BEFORE  THE 


Public  Utilities  Commission 

OF  THE 

STATE  OF  ILLINOIS. 


IN  THE  MATTER  OP  PROPOSED  GENERAL  HEARINGS  CON- 
CERNING THE  ABILITY  OF  UTILITIES  TO  MEET  THE 
DEMANDS  FOR  SERVICE  AND  TO  MAKE  THE 
NECESSARY  ENLARGEMENTS  AND  EX- 
TENSIONS THEREFOR. 


TRANSCRIPT  OF  TESTIMONY 


if  |:M;,:' .^'• 

•'  ' ■■  ' '■*  '■■  ■'  ' ‘ 


I. 


CENTRAL  CIRCULATION  AND  BOOKSTACKS 

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I|  4 b 

INDEX. 


Witnesses.  page 

Barney,  R.  C 469 

Berry,  0.  F 320 

Blair,  Henry  A. — 

Direct  examination  42 

Cross-examination  • 212 

Bloom,  Edgar  S 300d,  342 

Chandler,  H.  P 282 

Cheadle,  C.  B 486 

Colean,  W.  H 495 

Compton,  Wm.  B 451 

Corey,  Chester — 

Direct  examination  87 

Choss-examination  287 

Dawes,  Charles  G. — 

Direct  examination  72 

Cross-examination  220 

Denman,  B.  J 343 

Folds,  Charles  W. — 

Direct  examination  163 

Cross-examination  168 

Forgan,  David  R. — v 

Direct  examination 97 

Cross-examination  284 

Forgan,  James  B. — 

, Direct  examination  113 

Cross-examination  116 

Hagenah,  Wm.  J 386 

Hodges,  B.  E 448 

Holbrook,  J.  H 475 

Hulbert,  E.  D. — 

Direct  examination  46 

Cross-examination  290 


11 


Witnesses. 

Insull,  Samuel — page 

Direct  examination  7 

Cross-examination  195 

Jones,  Breckenridge  457 

Jones,  Edwin  E 441 

Masserang,  John  B 472 

Noble,  C.  A 510 

Piez,  Charles — 

Direct  examination  143 

Cross-examination  145,161 

Prather,  R.  V 436 

Reynolds,  Greorge  M. — 

Direct  examination  242 

Cross-examination  262 

Richberg,  Donald  R 178 

Samp  s ell,  Marshall  E 368 

Sawyer,  W.  H 330,  356 

Schweppe,  Charles  H. — 

Direct  examination  105 

Cross-examination  289 

Spivey,  A.  T 506 

Stuart,  Harold  L 58 

Summers,  C.  P 480 

Sunny,  B.  E 27,212 

Tissier,  F.  A 503 

Wheeler,  Harry  A. — 

Direct  examination  13(5 

Cross-examination  285 

Order  of  Illinois  Public  Utilities  Commission, 
dated  April  20, 1920,  that  General  Hearings  be 
Held 


1 


Ill 


Exhibits. 


PAGE 


Bloom  Exhibit  3 — Comparison  of  Revenues,  Ex- 
penses and  Net  Earnings  for  years  1916  and 
1919  (C.  U.  T.  Co.) 307 

Corey  Table — Memorandum  of  Recent  Short  Term 

Issues 88 

Hagenah  Exhibit  1 — Commodity  Prices  in  Eng- 
land— Index  Nos.  1817-1916 392 

Hagenah  Exhibit  2 — Commodity  Prices  in  the 

United  States — Index  Nos.  1860-1919  395 


Hagenah  Exhibit  3 — Relative  Fluctuations  of 
Commodity  Prices  at  Wholesale  and  Retail 
and  Wages  in  U.  S.  during  Civil  War  and 

seven  years  after  its  close 398 

Hagenah  Exhibit  4 — Money  in  Circulation 402 

Hagenah  Exhibit  5 — National  Debts  and  Interest 
Rates  Changes  in  Percentage  of  Gold  Re- 
serve to  Note  Issues 407 

Hagenah  Exhibit  6 — Notes  in  Circulation  of 

World’s  Greatest  Banks 409 


Hagenah  Exhibit  7 — Index  of  Prices  of  Invest- 


ment Bonds  412 

Hagenah  Exhibit  8 — Bond  Prices  1901-1920 414 

Legal  Argument  (Statement)  by  Mr.  Dunbaugh.  . 293 

Letter  Oct.  1,  1917 — Sec’y  of  War  Baker  to  W.  H. 

Hays,  Chairman,  Indiana  State  Council  of  De- 
fense   301 

Prather  Questionnaire  436 

Resolution — City  of  Aurora,  111 513 

Resolution — City  of  Peoria,  111 496 


Resolution  of — 

Chicago  Association  of  Credit  Men . . 

Chicago  Chamber  of  Commerce 

Citizens  Association  of  Chicago 

Commercial  Club  

Illinois  Manufacturers  Association  . . 

Industrial  Club  of  Chicago  

Traffic  Club  

Union  League  Club 


^296, 297, 298 


v 


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BEFORE  THE 


PUBLIC  UTILITIES  COMMISSION 

OF  THE 

STATE  OF  ILLINOIS. 


In  the  Matter  of  Proposed  General  Hearings 
Concerning  the  Ability  of  Utilities  to  Meet 
the  Demands  for  Service  and  to  Make  the 
Necessary  Enlargements  and  Extensions 
Therefor. 


> 


TRANSCRIPT  OF  TESTIMONY,  CHICAGO  HEARING. 


The  Public  Utilities  Act  provides  that  the  Com- 
mission shall  have  general  supervision  of  public 
utilities  and  shall  keep  itself  informed  as  to  the 
manner  and  method  in  which  their  business  is  con- 
ducted, and  shall  examine  such  public  utilities  as 
to  the  manner  in  which  their  plants  are  operated, 
with  respect  to  the  adequacy  of  their  service. 

In  connection  with  hearings  now  pending  before 
the  Commission,  representations  have  been  made  as 
to  the  urgent  necessity  for  the  enlargement  and 
extension  of  the  plants  and  equipment  of  certain 
utilities  in  order  that  they  may  be  able  to  keep  up 
with  the  demands  of  the  public  for  the  service  ren- 
dered by  them.  Bepresentations  have  also  been  made 
to  the  Commission  in  connection  with  said  hearings 
as  to  economic  and  financial  conditions  which  it 
. is  alleged  make  it  difficult  to  provide  the  money 
necessary  for  such  enlargements  and  extensions.  It 
is  claimed  that  the  problems  confronting  the  public 


utilities  are  general  in  their  nature  and  that  the 
ability  of  these  utilities  to  meet  the  future  demands 
of  the  public  is  dependent  upon  the  prompt  solution 
of  those  problems.  Wliile  the  Commission  takes  no- 
tice of  these  general  conditions,  it  is  desirable  that 
the  specific  facts  relative  to  the  financial  difficulties 
which  have  been  encountered  by  these  utilities  in 
making  indispensable  enlargements  and  extensions 
should  be  presented  in  order  that  the  Commission 
may  have  accurate  information  as  to  the  precise  sit- 
uation. 

It  is  thekefoke  okdeked  that  general  hearings  shall 
be  held  for  the  purpose  above  stated,  in  the  hearing 
room  of  the  Commission,  Room  724  Insurance  Ex- 
change Bldg.,  Chicago,  Illinois,  on  Thursday,  April 
29,  1920,  at  10  o’clock  a.  m.,  and  in  the  hearing  room 
of  the  Commission  in  the  State  Capitol  at  Spring- 
field,  Illinois,  on  Monday,  May  3,  1920,  at  10  o’clock 
a.  m.,  and  that  opportunity  shall  be  afforded  at  said 
hearings  to  interested  utilities,  civic  associations, 
and  municipalities  to  present  evidence  and  sugges- 
tions concerning  the  subject  above  mentioned.  It  is 
desired  that,  so  far  as  practicable,  interested  par- 
ties in  Cook  County  and  Northern  Illinois  shall  at- 
tend the  hearing  at  Chicago,  and  that  interested 
parties  in  the  remainder  of  the  state  shall  attend  the 
hearing  at  Springfield. 

It  is  further  ordered  that  the  Secretary  of  the 
Commission  transmit  information  as  to  the  time  and 
place  of  said  hearings  to  interested  utilities,  civic 
associations,  and  municipalities. 

By  order  of  the  Commission,  at  Springfield,  Illi- 
nois, this  20th  day  of  April,  1920: 

(Signed)  R.  Aulan  Stephens, 

Secretary, 


8 


State  of  Illinois 
Public  Utilities  Commission. 

Chicago,  111.,  Thursday,  April  29,  1920. 

In  the  matter  of  proposed  general  hearings 
concerning  the  ability  of  utilities  to  meet 
the  demands  for  service  and  to  make  the 
necessary  enlargements  and  extensions 
therefor. 

Present : 

Chairman  Wilkerson,  presiding. 

Commissioner  Lucey, 

Commissioner  Shaw, 

Commissioner  Funk,  and 
Commissioner  Dempcy. 

Chairman  Wilkerson:  In  the  matter  of  proposed  gen- 
eral hearings  concerning  the  ability  of  utilities  to  meet 
the  demands  for  service  and  to  make  the  necessary  en- 
largements and  extensions  therefor.  The  Commission 
made  an  order  on  the  20th  of  April,  1920,  and  directed 
attention  to  the  provision  of  the  Public  Utilities  Act 
which  provides  that  the  Commission  shall  have  general 
supervision  of  public  utilities  and  keep  itself  informed 
as  to  the  manner  and  method  in  which  their  business  is 
conducted,  examine  such  public  utilities  as  to  the  man- 
ner in  which  their  plants  are  operated  with  respect  to 
adequacy  of  their  service,  and  the  order  further  recites 
that  in  connection  with  hearings  which  are  now  pending 
before  the  Commission  there  have  been  representations 
as  to  the  necessity  for  the  enlargement  and  extension 
of  plants  and  equipments  in  order  that  the  utilities  may 
be  able  to  keep  up  with  the  demands  of  the  public  service. 

Representations  have  also  been  made  in  connection 


4 


with  those  hearings  as  to  economic  and  financial  condi- 
tions. It  is  alleged  it  is  difficult  to  provide  for  the  neces- 
sary enlargement  and  extension.  It  has  been  claimed  to 
the  Commission  that  the  problem  that  confronts  the  util- 
ities in  this  respect  is  general  in  its  character,  and  for 
that  reason  it  was  deemed  in  the  interest  of  the  orderly 
presentation  of  these  matters  and  economy  of  time  that 
there  should  be  a general  hearing  at  which  an  oppor- 
tunity would  be  afforded  to  such  utilities  and  civic  asso- 
ciations and  municipalities  who  might  desire  to  submit 
evidence  or  make  representations  to  the  Commission  to 
present  those  matters  in  a connected  and  systematic  way 
and  thereby  avoid  the  confusion  in  presentation  which 
might  result  if  the  matter  were  brought  to  the  attention 
of  the  Commission  in  isolated  proceedings,  and  for  that 
purpose  a hearing  was  fixed  today. 

Some  of  the  interested  parties  have  already  indicated 
to  the  Commission  their  desire  to  be  heard.  I think  Mr. 
Bangs  stated  that  certain  utilities,  and  perhaps  other 
companies,  bankers,  and  so  forth,  would  appear  here  this 
morning  and  desire  to  be  heard.  Have  you  a list,  Mr. 
Bangs,  of  the  parties  who  desire  to  be  heard,  so  far  as 
you  are  concerned? 

Mr.  Bangs : Yes,  Mr.  Chairman.  The  utilities  of  Cook 
County  and  the  adjacent  territory  that  are  included  in 
this  hearing  under  the  order  of  the  Commission  are  rep- 
resented here  today  by  Mr.  Samuel  Insull,  Mr.  B.  E. 
Sunny  and  Mr.  Henry  Blair.  These  gentlemen  desire  to 
make  statements  and  preferably  under  oath,  with  refer- 
ence to  the  matters  referred  to  in  the  order  that  the 
chairman  has  just  read. 

Mr.  Insull  is  here  as  president  of  the  Commonwealth 
Edison  Company,  the  Peoples  Gas  Light  & Coke  Com- 


5 


pany,  the  Public  Service  Company  of  Northern  Illinois 
and  as  chairman  of  the  Board  of  Directors  of  the  Chicago 
Elevated  Railway  Company.  Mr.  Budd,  the  president  of 
the  latter  company,  is  out  of  town. 

Mr.  Sunny  'is  here  as  president  of  the  Chicago  Tele- 
phone Company  and  Mr.  Blair  as  president  of  the  Chi- 
cago Surface  Lines,  and  chairman  of  the  Board  of 
Operations. 

These  gentlemen  have  requested  some  of  the  represen- 
tative bankers  and  investment  bankers  of  Chicago  to  ap- 
pear before  the  Commission  and  give  their  views  on  the 
present  financial  and  economic  situation  as  it  affects  the 
Public  Utilities  and  their  securities. 

For  the  convenience  of  the  Commission  we  prepared  a 
list  of  the  witnesses  who  will  appear  today  and  brief 
interrogatories  that  show  the  scope  of  their  testimony. 

Chairman  Wilkerson:  Before  we  proceed  with  the 
statements  of  these  witnesses,  are  there  any  other  inter- 
ested parties  who  desire  to  be  heard  at  this  hearing?  If 
so,  will  you  please  give  your  names  to  the  secretary.  Any 
other  interested  parties  who  desire  to  be  heard  in  con- 
nection with  the  matters  covered  by  the  order,  please 
give  their  names  to  the  secretary. 

Mr.  Richberg:  Donald  R.  Richberg,  special  counsel 
for  the  City  of  Chicago  in  gas  matters.  Not  offering  any 
evidence  but  desiring  to  be  heard  upon  the  question. 

Chairman  Wilkerson:  Any  one  else  who  desires  either 
to  present  evidence  or  to  be  heard  in  suggestions  to  the 
Commission  on  the  subject  covered  by  the  general  order? 

Mr.  Cleveland:  If  the  Commission  please,  Mr.  Jacob 
Ringer  and  perhaps  myself  may  want  to  be  heard  in  ref- 
ereuce  to  the  Telephone  case,  and  Mr.  David  H.  Jackson 
and  Mr.  Ro])oi'ts  and  myscir  may  want  to  bo  hoard  about 


6 


the  elevated  case,  and  Mr.  Eoberts  and  myself  on  the 
Surface  Lines  case  on  behalf  of  the  City  of  Chicago. 

We  will  do  this  with  a view  of  aiding  all  we  can  in  the 
hearing  and  presenting  our  views,  but  of  course  it  will 
be  understood  we  are  not  waiving  any  rights  we  may 
have,  and  then  insist  that  matters  of  this  kind,  so  far  as 
these  three  pending  cases  are  concerned,  should  be  heard 
and  disposed  of  so  far  as  they  apply  to  those  particular 
cases.  We  do  not  want  to  waive  that  position. 

Chairman  Wilkerson:  Anyone  else  who  desires  to  be 
heard  in  connection  with  the  matters  covered  by  this  gen- 
eral order?  Any  other  interested  parties  who  may  de- 
sire to  be  heard  will  be  given  the  opportunity  at  the  ap- 
propriate time  by  giving  their  names  to  the  secretary  of 
the  Commission.  Arrangements  will  be  made  to  receive 
their  testimony  or  their  statements. 

Having  in  mind  that  there  are  a large  number  of  state- 
ments to  be  made  to  the  Commission  today  and  in  the 
interest  of  an  orderly  presentation  of  the  matters  covered 
by  the  order,  the  Commission  has  determined  that  par- 
ties who  desire  to  submit  statements  shall  be  permitted 
to  do  so,  without  interruption,  except  as  some  member  of 
the  Commission  may  desire  to  ask  questions.  If  any  of 
those  interested  in  the  hearing  may  desire  hereafter  to 
cross-examine,  any  of  the  witnesses  who  have  appeared 
this  morning,  that  fact  may  be  indicated  to  the  Commis- 
sion in  an  appropriate  way,  together  with  the  subject 
upon  which  the  cross-examination  is  desired,  and  ar- 
rangement will  be  made  later  for  that  part  of  the  hear- 
ing. It  was  thought  that  this  matter  would  be  presented 
in  a more  connected  and  more  systematic  manner  to  the 
Commission  if  these  parties  who  have  availed  themselves 
of  this  opportunity  be  permitted,  so  far  as  their  main 


7 


statements  are  concerned,  to  proceed  without  interrup- 
tion, and  the  matter  of  further  examination  or  cross- 
examination  be  taken  up  later.  Those  who  may  desire  to 
submit  evidence  will  be  sworn,  please. 

(Colloquy  omitted.) 

Chairman  Wilkerson : The  questions  which  have  been 
handed  me,  Mr.  Insull,  as  an  outline  for  your  statement 
are  the  following: 

1.  Will  you  state  the  situation  of  the  companies, which 
you  represent  here  with  regard,  first,  to  the  normal 
growth  of  each  one  of  the  companies. 

. 2.  The  present  demand  for  extensions  and  enlarge- 

ments. 

3.  The  ability  to  meet  that  demand. 

4.  The  amount  of  new  capital  which  the  company 
would  need  to  build  the  necessary  extensions  to  the  plant, 
and 

5.  The  experience  which  you  have  had  in  attempting 
to  secure  new  capital. 

I assume  you  have  a copy  of  that  outline  before  you 
and  with  that  before  you  you  may  proceed  to  make  your 
statement. 


Samuel  Insull,  a witness  herein,  having  been  previously 
sworn,  testified  as  follows : 

The  question,  Mr.  Chairman,  involved  really  involves 
all  the  utilities  of  Chicago  and  is  such  an  im- 
portant one  and  of  such  wide  scope  that  I will  pref- 
ace my  remarks  by  presenting  a few  figures  showing 
what  is  really  the  extent  to  which  the  community  as  a 
whole  is  concerned.  In  presenting  figures  I am  dealing 


8 


with  gross  figures.  For  instance,  the  assets  of  the  Com- 
monwealth Edison  Company  exceed  gross  $130,000,000. 
There  are  some  offsets  to  that,  of  course,  and  it  employs 
5,300  people  and  supplies  1,600,000,000  kilowatt  hours  of 
electric  energy  to  415,000  premises  in  the  City  of  Chi- 
cago. That  is  more  energy  than  is  turned  out  in  any 
center  of  population  of  the  world,  where  steam  is  the 
basis  of  the  energy. 

The  Chicago  Telephone  Company  has  assets  gross 
used  in  Chicago  of  upwards  of  $72,000,000,  employs 
12,900  people,  and  carries  743,000,000  messages  per  an- 
num for  550,000  telephones. 

That  is  one  of  the  largest  institutions  of  its  kind  in  the 
world.  I presume,  that  the  city  of  New  York  is  the  only 
city  where  those  figures  would  be  exceeded. 

The  Peoples  Gas  Light  & Coke  Company  has  gross 
assets  of  $111,000,000.  It  employs  over  5,000  people  and 
delivers  in  excess  of  26,500,000,000  feet  to  more  than 
700,000  meters  per  annum.  That  is  the  largest  output  of 
gas  in  the  United  States  with  one  exception. 

The  Surface  Lines  have  assets  of  upwards  of  $186,- 
000,000,  and  employs  13,000  people  and  carries  1,300- 
000,000  passengers  per  annum. 

The  Chicago  Elevated  Railways  have  assets  of  up- 
wards of  $120,000,000,  employs  5,400  people,  and  carries 
185,000,000  passengers  a year. 

The  combined  utilities  of  the  city  have  upwards  of 
$620,000,000  gross  assets,  and  receipts  of  upwards  of 
$135,000,000  a year  and  employ  upwards  of  40,000  em- 
ployes. 

At  present  prices  of  labor  and  material  it  is  very 
doubtful  whether  their  property  could  be  duplicated  for 


9 


loss  than  $1,000,000,000  to  $1,250,000,000,  and  it  would 
take  upwards  of  ten  years  to  build  the  plants  that  they 
are  operating. 

Now,  all  through  the  war  those  properties  have  been 
endeavoring  to  operate  at  a minimum  of  capital  expen- 
diture. Altogether  apart  from  the  ease  or  difficulty  in 
getting  the  money,  partly  from  pressure  from  the  Fed- 
eral Government  and  partly  from  pressure  exerted 
through  the  Illinois  Commission  and  partly  as  a matter 
of  patriotic  duty  their  endeavor  was  to  get  through  with 
the  war  with  the  tying  up  of  the  least  possible  amount  of 
capital,  and  manage  to  function,  so  at  this  time  they  are 
confronted  with  the  necessity  of  very  large  expenditure. 

Take  the  Commonwealth  Edison  Company,  for  in- 
stance. In  order  to  bring  itself  up  to  the  necessary  mar- 
gin of  capacity  that  it  thought  desirable  prior  to  the  war 
they  need  to  spend  about  twenty  million  dollars. 

You  have  had  before  you  an  application  from  the  Chi- 
cago Telephone  Company  based  upon  the  necessity  of 
their  spending  twenty  million  dollars. 

The  Peoples  Gas  Light  & Coke  Company  within  the 
last  few  months  has  arranged  through  other  corporations 
to  have  spent  for  their  benefit  around  eighteen  million 
dollars,  and  including  that  expenditure  and  the  expendi- 
ture that  they  ought  to  make  themselves,  they  need  to 
spend  about  twenty-five  million  dollars. 

The  Chicago  Elevated  Roads  have  to  spend  not  less 
than  ten  million  dollars. 

I am  not  as  familiar  with  the  figures  of  the  Surface 
Lines  as  the  other  figures,  but  Mr.  Blair  is  going  to  tes- 
tify on  that  particular  subject,  but  I think  it  is  safe  to 
assume  that  they  ought  to  spend  right  away  twenty-five 


10 


million  dollars,  or  take  it  as  a whole,  the  utilities  of  this 
city  need  to  spend  in  order  to  bring  their  facilities  up  to 
what  they  would  have  been  under  normal  conditions,  if 
we  had  gone  ahead  in  a normal  way  and  not  had  the  great 
war,  and  money  was  at  a normal  price  and  material  and 
labor  at  normal  prices,  they  would  have  over  the  period 
of  the  war  probably  exceeded  the  expenditures  that  I 
have  stated  ought  to  be  made  to  bring  their  plants  up  to 
a condition  so  that  they  can  function  and  respond  to  the 
ever  growing  requirements  of  a flourishing  metropolitan 
community  like  the  City  of  Chicago. 

Now,  the  difficulty  in  the  way  is  the  question  of  rais- 
ing money.  I am  wandering  a little  astray  from  the 
question  as  it  has  been  put  to  me,  but  it  is  such  a broad 
subject  that  it  is  the  only  possible  way  that  I can  answer 
the  question.  It  is  necessary  to  present  to  you  some  of 
the  difficulties  that  confront  us  in  affecting  the  cost  of  the 
money.  It  comes  down  to  a question  of  aifecting  our 
credit. 

Our  investors  who  invest  in  our  junior  securities 
have  been  very  much  concerned  during  the  last  two  or 
three  years  as  to  the  general  outcome  of  this  class  of  in- 
vestment. That  is  caused  partly  by  the  agitation  that 
takes  place  in  this  community  ever  and  anon  with  rela- 
tion to  one  or  another  of  the  public  utilities,  and  making 
of  those  utilities  the  football  of  politics  is  one  of  the  fun- 
damental underlying  causes  affecting  the  credit  of  these 
great  institutions,  which  if  they  fail  to  flourish  the  com- 
munity must  fail  to  flourish  because  it  would  not  be  pos- 
sible for  a community  like  Chicago  to  function  properly 
unless  its  great  utilities  were  able  to  do  their  share  of 
functioning  properly.  Now  to  my  mind  that  is  the  most 
serious  problem  that  you  gentlemen  have  to  meet  in  con- 


11 


nection  with  adjudicating  on  the  subject  of  rate  of  return 
to  public  utilities. 

If  a man  can  go  and  invest  his  money  in  a farm  mort- 
gage at  six  or  seven  per  cent  and  be  reasonably  sure  of 
getting  his  principal  back  when  the  mortgage  becomes 
due,  there  is  not  any  particular  reason  why  he  should 
invest  his  money  at  six  or  seven  per  cent  at  the  risk  of 
a public  utility  that  is  being  attacked  from  day  to  day 
ostensibly  for  the  public  benefit,  but  as  is  very  generally 
recognized,  not  infrequently  for  the  individual  benefit  of 
the  politician  who  makes  the  attack. 

Now,  as  I say,  that  is  to  my  mind  the  most  serious 
thing,  more  than  the  working  of  supply  and  demand  in 
its  effect  on  the  value  of  money,  more  than  any  other 
cause  that  is  the  question  that  affects  this  proposition. 

Another  question  is  the  question  of  valuation  of  prop- 
erty. Certainly  the  junior  securities  of  these  public 
utility  properties,  that  is  the  securities  that  are  not  evi- 
denced by  some  form  of  prior  lien  are  likely  to  be  very 
seriously  affected  by  the  general  trend  of  policy  of  the 
Public  Utilities  Commission  on  the  subject  of  Valuations. 
The  extent  to  which  the  companies  will  be  treated  lib- 
erally on  the  various  phases  in  connection  with  valua- 
tions of  property,  the  extent  to  which  the  money  put  in 
by  the  investor  for  the  development  of  the  property,  and 
probably  employed  in  the  purchase  of  large  amounts  of 
plant  and  material  (scrapped  from  time  to  time  in  the 
development  of  the  utility  business  in  which  the  money  is 
invested)  the  extent  to  which  this  body  will  recognize 
that  class  of  investment  in  any  valuation  has  a very  im- 
portant bearing  on  this  subject. 

Those  are  the  two  questions,  which  to  my  mind  bear 
more  than  anything  else,  except  rates,  and  as  I under- 


12 


stand  the  question  of  rates  does  not  come  within  the  scope 
of  this  question  presented  to  me — those  two  problems 
have  more  to  do  than  anything  else  with  the  question  of 
establishing  of  credit. 

Chairman  Wilkerson:  The  question  is  the  rate  of  re- 
turn. 

Mr.  Insull:  My  remarks  are  based  on  the  assumptioii 
that  rates  for  service  will  be  given  on  the  basis  that  will 
allow  the  payment  of  all  necessary  operating  expenses 
and  depreciation  and  reserve  charges,  and  with  such  ad- 
dition as  a rate  of  return — whatever  rate  of  return  should 
be  necessary,  so  that  I am  not  going  to  refer  today  to 
the' question  of  rates  for  service. 

I presume  the  two  properties  that  stand  about  on  a 
level,  so  far  as  credit  is  concerned,  the  two  properties 
here  in  Chicago,  are  the  Commonwealth  Edison  Com- 
pany and  the  Chicago  Telephone  Company. 

One  is  owned  in  the  community.  There  is  a relatively 
small  amount  of  stock  of  its  junior  securities  held  out- 
side of  the  State  of  Illinois,  a relatively  small  amount 
held  outside  of  the  City  of  Chicago  in  the  State  of  Illi- 
nois, so  that  company  is  sensitive  to  the  etfect  on  its  one 
junior  security,  its  stock,  so  far  as  the  question  of  raising- 
money  is  concerned. 

It  has  paid  for  a number  of  years  eight  per  cent  divi- 
dends, so  it  has  paid  what  would  be  considered  in  ordi- 
nary and  normal  times  liberal  dividends.  With  the  money 
market  in  a normal  condition  its  stock  would  ordinarily 
range  above  a six  per  cent  basis,  which  would  be  one 
hundred  thirty  three  dollars  a share,  in  fact,  one  hundred 
and  forty  dollars  is  about  a fair  basis  in  normal  times. 
• At  any  time  that  they  are  offering  their  stockholders 
stock  at  par,  new  stock  for  subscription  in  normal  time^ 


13 


that  stock  would  go  as  high  as  160.  At  this  time  it  is  a 
relatively  weak  security  in  the  market  varying  from 
104  to  108. 

Now,  the  Telephone  Company  is  in  somewhat  a differ- 
ent position.  Their  stock  is  to  a very  large  extent  held  by 
the  American  Telephone  & Telegraph  Company,  and  their 
stock  does  not  come  on  the  market. 

Now,  if  you  take  our  bonds,  the  Commonwealth  Edison 
five  per  cent  bonds  which  in  normal  times  the  company 
was  able  to  get  on  an  average  for  years  either  so  close  to 
par  or  in  extraordinarily  low  money  market  conditions 
above  par,  that  it  had  practically  no  discount  to  write  off 
on  its  bonds  for  years,  those  bonds  are  now  in  the  market 
today  at  81. 

It  is  necessary  for  the  Edison  Company  to  raise  be- 
tween four  and  five  million  dollars  this  year,  as  part  .of 
the  expenditures  that  I stated  we  had  in  contemplation 
to  bring  our  property  up  to  normal  capacity.  There  is 
no  possible  way  of  raising  that  money  by  selling  our 
bonds.  The  discount  would  be  so  great  on  a five  per  cent 
bond,  that  the  Commission  would  very  rightly  hesitate  in 
granting  us  permission  to  sell  the  securities.  Probably 
the  only  way  to  raise  money  for  that  purpose  this  year  is 
to  issue  short  time  securities  with  probably  bonds  as  col- 
lateral. What  that  money  would  cost  us  is  very  difficult 
to  state  at  this  time.  We  could  only  tell  when  we  actually 
come  to  sell  the  securities.  Money  has  been  growing  in- 
creasingly more  expensive  from  month  to  month. 

Now,  take  the  case  of  the  Peoples  Gas  Light  & Coke 
Company,  they  have  recently  made  an  agreement  under 
which  the  Koppers  Company  of  Pittsburgh,  a company 
that  installs  and  finances  gas  plants,  will  spend  about 
eighteen  million  in  building  two  gas  plants  for  them. 


14 


The  Koppers  Company  formed  a subsidiary  for  that  com- 
pany as  a manufacturing  company,  to  carry  out  the  op- 
eration. The  Gas  Company  will  eventually  acquire  that 
corporation.  It  is  very  desirable  that  it  should  acquire 
it  some  time' within  the  next  six  years  as  the  plants  are 
built.  I think  the  cost  of  money  is  pretty  well  illustrated 
by  the  placing  of  the  bonds  of  the  subsidiary  created  for 
the  building  of  those  plants,  the  Chicago  By-Products 
Coke  Company. 

As  I was  saying,  the  company  that  has  been  organized 
to  build  these  new  plants  for  the  Gas  Company  is 
financed  partly  by  the  issue  of  four  and  a half  millions  of 
stock  and  thirteen  million  first  mortgage  bonds  and  six 
hundred  thousand  dollars  second  mortgage  bonds. 

The  bonds  put  out  were  serial  bonds  running  from,  1 
think,  it  is  two  to  eighteen  years.  They  bear  seven  per 
cent  interest.  They  were  guaranteed,  principal  and  in- 
terest by  the  manufacturing  company  that  is  installing 
the  plant  and  that  concern  is  worth  net  assets  of  up- 
wards of  seven  and  a half  million  dollars. 

In  order  to  place  those  bonds  it  was  necessary  for  the 
contracting  company  to  arrange  with  its  principal  stock 
holders  to  put  up  thirteen  millions  of  marketable  se- 
curities, and  it  was  specified  that  those  securities  should 
not  be  public  utility  securities,  behind  the  thirteen  mil- 
lions of  bonds  sold. 

I have  been  told  this  week  that  I was  very  fortunate 
to  have  concluded  the  negotiation  for  the  installation  of 
those  plants  when  I did,  as  if  it  was  up  today  it  would  not 
be  possible  to  supply  the  money  at  any  price.  I do  not 
know  exactly  what  that  money  cost  the  concern  that  is  in- 
stalling the  plant.  The  bonds  were  also  guaranteed,  prin- 
cipal and  interest  by  the  Peoples  Gas  Light  & Coke  Com- 


15 


pany.  That  may  not  seem  to  be  a very  good  guarantee 
just  at  this  time,  but  in  view  of  the  fact  that  the  Peoples 
Gas  Light  & Coke  Company  take  all  of  the  gas  that  is 
manufactured,  why  indirectly — and  pay  a given  price  for 
it,  and  cannot  run  their  business  without  taking  it — their 
guarantee  is  of  some  value  in  the  situation.  Notwith- 
standing the  guarantee  of  the  manufacturing  companies, 
notwithstanding  the  guarantee  of  the  Peoples  Gas  Light 
& Coke  Company  and  notwithstanding  that  the  property 
is  amply  good  for  the  bonds  issued  with  a very  fair  mar- 
gin in  junior  securities,  it  is  not  possible  to  place  those 
securities  except  that  they  be  backed  by  an  amount 
of  securities  equal  to  the  amount  of  bonds,  and  that  that 
security  should  be  other  than  a public  utility  security. 

Now,  the  situation  of  the  elevated  roads,  so  far  as  ob- 
taining mone}^  is  concerned,  it  is  an  impossibility.  They 
have  twelve  million  dollars,  I think  it  is,  of  overdue  notes 
out  at  this  time.  They  are  in  the  hands  of  a noteholders’ 
protective  committee.  Practically  the  same  situation  if 
the  securities  behind  those  notes  represented  property 
instead  of  securities,  they  would  be  in  the  hands  of  a re- 
ceiver. They  are  practically  in  the  hands  of  a receiver 
today.  They  are  paying  no  interest  on  the  notes  so  their 
chance  of  financing  is  absolutely  nil. 

To  go  back  to  the  Gas  Company,  it  is  not  possible  for 
the  Gas  Company  at  this  time  to  sell  its  bonds.  They 
are  quoted  in  the  market,  thmr  refunding  bonds,  which  is 
their  largest  issue,  are  quoted  in  the  market  between 
sixty  and  sixty-three,  and  in  another  case  I bore  witness 
to  the  fact  they  are  losing  eighty-five  hundred  dollars  a 
day  at  this  time,  and  you  can  well  understand  that  it  is 
pretty  hard  for  them  to  get  money. 

Now,  all  these  various  conditions,  together  with  the  fact 


36 


that  government  securities  are  selling  on  a basis  giving 
a very  big  return,  that  all  classes  of  industrial  securities 
are  selling  on  a basis  to  give  a very  big  return,  all  these 
various  factors  and  the  fact  that  there  is  not  enough 
money  to  buy  these  securities  otfered  throughout  the 
country  at  this  time,  irrespective  of  whether  they  are 
public  utilities  securities  or  others,  why  that  makes  money 
extremely  expensive  for  the  utilities. 

The  impairment  of  their  credit,  owing  to  the  fears  of 
the  present  security  holders  and  the  great  demand  for 
money  for  other  purposes,  and  a fact  that  I have  not 
touched  on,  the  great  demand  of  money  for  utility  pur- 
poses on  account  of  the  very  large  increase  in  the  cost 
of  all  classes  of  labor  and  material,  which  means  that 
money  only  goes  about  half  the  distance  that  it  has 
gone  heretofore,  make  the  price  of  the  money  very  high, 
indeed.  My  judgment  is  that  so  far  as  new  money  is 
concerned,  that  the  utilities  as  a whole  have  got  to  pay 
for  that  money  anywhere  varying  from  eight  to  ten  per 
cent  dependent  upon  the  credit  and  standing  of  the  par- 
ticular institution  requiring  the  money. 

I would  consider  eight  per  cent  money,  or  to  put  it  con- 
cretely, I would  consider  eight  per  cent  money  for  the 
Commonwealth  Edison  Company  under  the  conditions 
that  exist  today  very  cheap  money,  if  I could  get  it  for 
say,  five  years. 

Other  institutions,  I would  consider  for  the  Peoples 
Gas  Light  & Coke  Company  ten  per  cent  money  cheap 
money  at  this  time. 

I was  reminded  by  one  of  my  counsel  here  that  what  I 
am  discussing,  while  it  affects  the  rate  of  return,  does  not 
mean  that  it  should  be  the  rate  of  return  on  the  property 
as  a whole.  . That  is  a question  I think  for  your  Commis- 


17 


si'on  to  decide.  T can  tell  you  what  it  costs  me  to  get 
money. 

What  rate  of  return  we  should  have  on  the  property 
as  a whole  in  order  to  enable  us  to  get  that  money  involves 
your  giving  us  a rate  that  will  first  of  all  maintain  our 
credit,  that  will  give  a sufficient  return  to  our  junior  se- 
curity holders  so  that  they  won’t  lose  confidence  in  their 
junior  investment. 

With  those  two  things  the  senior  securities  cannot  be 
sold  in  my  judgment  for  the  benefit  of  properties  of  the 
highest  credit  on  a basis  that  would  yield  less  than  eight 
per  cent,  and  for  concerns  of  less  credit  on  a basis  that 
would  yield  less  than  ten  per  cent. 

In  closing,  I would  like  to  say  I do  not  mean  to  say  • 
there  are  not  extraordinary  cases  where  you  can  get 
some  cheaper  money. 

In  the  Public  Service  Company  of  Northern  Illinois  we 
came  to  your  Commission  for  authority  to  issue  some 
preferred  stock  and  by  selling  it  in  very  small  amounts 
to  our  customers,  on  the  installment  plan,  we  have  been 
able  to  get  some  six  per  cent  money,  but  that  is  extraordi- 
nary. That  is  getting  at  a class  of  investor  that  is  not 
in  the  habit  of  buying  securities  and  that  is  in  the  habit 
of  saving  in  very  small  amounts,  and  fixing  our  situation 
so  that  he  could  get  our  securities  in  small  amounts.  That 
is  about  the  only  exception,  that  class  of  investment,  to 
the  general  rule.  . ; 

I think  that  is  all. 

Commissioner  Shaw:  Mr.  Insull,  what  is  the  present 
condition,  we  will  say,  as  to  the  Commonwealth  Edison 
Company  and  the  Public  Service  Company  of  Northern 
Illinois?  When  I say  condition  I am  referring  to  your 


18 


plant,  the  capacity  of  the  plant,  to  meet  its  present  de- 
mands, and  you  may  say  its  future  demands,  we  will  say, 
for  the  next  one  or  two  years. 

Mr.  Insull:  We  will  be  very  close  in  both  institutions, 
very  close  indeed  for  power  during  the  winter  load  of 
1920.  If  we  have  luck  and  can  keep  all  of  our  machinery 
running  we  will  just  get  through,  and  of  course  we  put  in 
units  each  of  very  large  capacity,  so  that  the  loss  of  one 
unit  makes  a very  great  difference,  we  will  be  pressed 
very  hard. 

Our  present  plans  contemplate  the  expenditure  between 
now  and  the  end  of  1920  of  sums  that  will  make  it  neces- 
sary to  raise  at  the  very  lowest  figure  during  this  year 
and  next  year  about  ten  million  dollars,  of  which  five  mil- 
lion dollars  must  be  raised  during  the  balance  of  this 
year. 

With  the  stuff  that  is  ordered  but  not  financed  it  will 
carry  us  through  the  next  year  and  the  year  after,  but 
with  the  stuff  we  now  have  we  can  just  squeeze  through 
next  winter. 

Commissioner  Lucey:  Have  you  made  any  computa- 
tion or  have  you  any  figures  indicative  of  the  number  of 
institutions  and  the  number  of  employes  in  those  institu- 
tions that  may  be  dependent  upon  these  companies  for 
power  or  other  facilities  necessary  for  their  function. 

Mr.  Insull:  No.  The  entire  transportation  system  is 
dependent  upon  us  for  its  power,  the  entire  transporta- 
tion system  of  Chicago,  but  I have  never  made  estimates 
as  to  the  number  of  employes  that  would  be  affected  by 
a shutdown  on  our  industrial  power  business. 

Commissioner  Lucey:  I asked  that  question  in  order 
to  ask  you  if  the  fact  of  an  institution  of  that  character 


19 


which  has  so  many  customers  and  of  such  importance, 
hiis  not  such  an  assured  continuity  that  there  could 
not  be  any  lack  of  credit,  with  the  thought  in  view  that 
this  is  a continuing  business,  that  presumably  it  will  earn 
dividends,  at  least  have  interest  charges  and  under  those 
circumstances,  and  under  those  conditions  what  is  the 
reason  that  it  has  difficulty  in  financing  itself  even  in 
these  days? 

Mr.  Insull : I think  general  distrust  of  this  class  of  se- 
curities for  the  reason  I have  stated. 

Commissioner  Lucey:  I am  saying  this  institution, 
which  unquestionably  supplies  a great  many  industries, 
and  there  being  no  question  about  it  being  a continuing 
business,  is  that  also  subject  to  that  same  general  remark 
that  you  have  made? 

Mr.  Insull : The  only  evidence  I think  on  that  sub- 
ject would  be  the  prices  at  which  our  securities  are  quoted 
in  the  market,  and  the  daily  conversations  that  I have 
with  my  stockholders. 

Commissioner  Lucey:  That  condition  which  you  out- 
line should  not  be  applicable  to  the  Commonwealth  Edi- 
son Company  because  it  has  had  no — 

Mr.  Insull:  It  is  very  deplorable  that  it  should.  We 
have  not  had  to  come  to  the  Commission  for  relief  on 
rates. 

Commissioner  Lucey:  You  have  not  been  to  the  Com- 
mission since  it  was  created. 

Mr.  Insull:  No. 

Commissioner  Lucey : Your  business  is  going  on  under 
the  same  control. 

Mr.  Insull:  Yes. 

Commissioner  Lucey : It  is  growing  constantly. 


20 


Mr.  Insull:  Yes.  . - 

Commissioner  Lucey : It  is  presumably  making  money 
without  going  into  that  feature  of  it! 

Mr.  Insull:  Yes. 

Commissioner  Lucey:  Its  credits  ought  to  be  in  the 
banks  as  good  as  it  was  in  1912  and  19131 

Mr.  Insull : Yes.  - • 

Commissioner  Lucey:  Yet  it  is  affected  in  the  same 
way  as  the  other  utilities. 

Mr,  Insull:  Yes.  I have  discussed  so  freely  the  Com- 
monwealth Edison  Company  because  I cannot  myself  see 
any  reason  for  it.  Relatively  it  is  not  doing  as  well  as  it 
did  before  the  war  but  it  has  never  changed  its  rate  of 
depreciation  charge.  It  has  never  changed  its  reserve 
charges  in  its  accounts.  Its  accounts  are  kept  precisely 
the  same  as  they  were  before  the  war.  We  are  going 
along  just  the  same  and  yet  I would  be  afraid  to  offer — 
I am  talking  absolutely  candidly,  talking  just  as  candidly 
as  I would  to  my  Board  of  Directors,  although  I realize 
I am  talking  publicly — I would  be  afraid  to  offer  a large 
lot  of  Commonwealth  Edison  Company  stock  to  the  stock- 
holders and  expect  to  see  them  subscribe  to  it  at  par,  and 
it  would  give  them  an  eight  per  cent  return  and  it  would 
put  up  in  reserve  ample  funds  to  protect  the  property  in 
the  future  and  protect  us  against  any  of  the  difficulties 
that  I have  referred  to  here,  such  as  difficulties  as  to 
valuation  and  apparatus  becoming  obsolete.  There  is  no 
question  about  it.  I don’t  understand  it,  Mr.  Commis- 
sioner. 

Commissioner  Funk:  I don’t  quite  get  the  distinction 
or  the  difference.  You  spoke  of  two  utilities  with  which 
you  are  connected. 


21 


Mr.  Insull : Three. 

Commissioner  Funk : The  Peoples  Gas  Light  and  Coke 
Company,  you  said  if  you  could  borrow  money  for  them 
at  ten  per  cent  for  five  years,  you  would  consider  it  very 
cheap  money? 

Mr.  Insull:  Yes. 

Commissioner  Funk : If  you  could  borrow  money  for 
the  Commonwealth  Edison  Company  at  eight  per  cent 
for  five  years  you  would  consider  that  cheap  money? 

Mr.  Insull:  Yes. 

Commissioner  Funk : Without  particularly  comment- 
ing upon  the  financial  conditions  of  the  two  companies, 
it  is  well  known  that  the  Commonwealth  Edison  Com- 
pany has  not  passed  any  dividends  ? 

Mr.  Insull:  Yes. 

Commissioner  Funk:  That  is  correct? 

Mr.  Insull:  Yes. 

Commissioner  Funk:  And  the  Peoples  Gas  Light  & 
Coke  Company  has  passed  a number  of  dividends? 

Mr.  Insull:  Yes. 

Commissioner  Punk : And  yet  the  same  general  situa- 
tion, the  difficulty  is  there,  and  the  only  measure  of  dif- 
ference is  two  per  cent. 

Mr.  Insull : A little  difference  in  credit. 

Commissioner  Funk:  Two  per  cent  in  the  rate  of  in- 
terest. 

Mr.  Insull:  That  is  twenty-five  per  cent  in  the  cost 
of  money. 

Commissioner  Funk:  Yes,  but. the  difficulty  is  there 
just  the  same. 


22 


Mr.  Insull:  Yes,  there  is  no  doubt  about  it. 

Commissioner  Funk : So  it  is  hard  to  see  through  the 
cloud  or  to  see  the  answer.  The  Commonwealth  Edison 
Company  is  conceded  to  be  well  managed  and  prosperous 
and  always  paid  its  dividends! 

Mr.  Insull : Yes. 

Commissioner  Funk : And  that,  of  course,  is  the  light 
that  we  are  seeking. 

Mr.  Insull:  Mr.  Dunbaugh,  Mr.  Shaw  asked  me  if 
you  understood,  in  order  to  meet  our  demands  in  1921 
we  have  got  to  start  installing  the  apparatus  this  year. 
I told  him  I thought  you  as  an  engineer  thoroughly  under- 
stood that  side  of  it. 

Commissioner  Shaw : I do  not  know  whether  I do  or 
not.  The  purpose  of  my  question  is  to  make  that  state- 
ment if  that  is  true. 

Mr.  Insull:  Yes,  it  takes  from  two  to  three  years  to 
build  a plant  on  the  scale  that  we  have  to  build  it  in 
Chicago  at  this  time.  Possibly  the  second  winter  you 
can  get  partial  use  of  some  of  the  plants,  but  the  work 
started  in  1920  would  not  come  into  general  use  until 
1923.  You  have  to  start  between  two  and  three  years 
ahead.  That  is  so  generally  of  all  these  large  utilities 
whether  it  is  electric  light  or  gas  or  anything  else. 

Chairman  Wilkerson:  Returning  to  the  question  to 
which  Senator  Funk  directed  attention.  As  I understand 
you  stated  as  your  conclusion  that  this  general  situation 
which  you  described  in  the  first  part  of  your  testimony 
affected  not  only  those  utilities  which  were  not  only  di- 
rectly concemed,  but  affected  the  credit  of  the  other  util- 
ities like  the  Commonwealth  Edison  Company  which  was 
not  directly  concerned,  but  which  were  utilities  in  this 
state. 


23 


Mr.  Insull:  There  is  no  question  about  it,  whatever, 
Mr.  Chairman,  no  question  whatever  that  the  general  atti- 
tude of  the  community  toward  the  utilities  of  Chicago  af- 
fects the  best  and  the  poorest,  and  in  speaking  of  that 
attitude  I would  speak  in  all  fairness  not  alone  of  indi- 
viduals who  for  political  purposes  attack  utilities,  but  I 
would  say  go  further.  This  is  a place  for  concession 
and  candor — 

Chairman  Wilkerson:  Yes,  sir. 

Mr.  Insull : I would  go  further  and  state  that  I think 
that  one  of  the  greatest  drawbacks  on  my  line  of  business 
in  this  community  is  the  lack  of  support  that  a great  in- 
dustrial set  of  institutions  employing  six  hundred  million 
dollars  of  capital  and  transacting  one  hundred  and  thirty- 
five  to  one  hundred  and  forty  millions  of  business  a 
year,  that  the  lack  of  co-operation  and  support  on  the 
part  of  the  press  of  the  city  is  a very  serious  thing  so 
far  as  the  financial  stability  and  credit  of  those  financial 
institutions  is  concerned. 

I know  in  making  that  statement  I lay  myself  open  to 
personal  criticism,  but  being  responsible  more  than  any 
other  man  in  this  community  for  very  large  investments 
of  other  people  in  public  utilities,  I think  it  is  a good 
thing  once  in  a while  to  face  the  situation  and  state  the 
facts  just  as  they  are. 

Commissioner  Shaw:  Mr.  Insull,  going  back  to  my 
former  question  a little  more  in  detail,  it  has  been  repre- 
sented to  the  Commission  especially  as  concerning  some 
of  the  downstate  utilities  that  during  the  war  they  were 
unable  to  obtain  units  such  as  boilers  and  generators  for 
various  reasons,  one  being  that  the  government  was  com- 
mandeering during  the  war,  on  account  of  the  shipbuild- 
ing, that  class  of  units;  another  the  inability  to  obtain 


24 


labor  and  also  in  connection  with  that  their  maintenance 
was  not  kept  up  to  standard  and  for  all  those  reasons 
many  of  the  plants  are  now  being  operated,  so  to  speak, 
overloaded  or  beyond  their  capacities.  I was  wonder- 
ing whether,  take,  for  instance,  the  Commonwealth  Edi- 
son Company  and  the  Public  Service  Company  of  North- 
ern Illinois,  whether  they  find  themselves  at  this  time 
in  a similar  condition  as  represented  by  some  of  the 
downstate  utilities. 

Mr.  Insull:  Yes,  sir.  That  condition  still  continues 
and  must  continue  until  we  catch  up  and  get  our  plants 
up  to  date.  Deliveries  are  very  hard  to  obtain,  not  only 
on  large  units  but  on  smaller  units,  very  hard,  and  that 
situation,  I think,  will  last  for,  oh,  maybe  three  to  four 
years  on  very  large  units,  and  about  two  years  on 
smaller  units. 

Commissioner  Wilkerson : This  one  further  question  I 
would  like  to  ask  you,  Mr.  Insull. 

You  have  spoken  of  certain  of  these  enlargements  and 
extensions  as  being  absolutely  indispensable. 

Mr.  Insull:  Yes. 

Chairman  Wilkerson : You  said  in  the  case  of  the  Com- 
monwealth Edison  Company,  you  must  begin  by  a certain 
time. 

Mr.  Insull:  Yes. 

Chairman  Wilkerson : To  make  provision. 

Mr.  Insull:  Yes. 

Chairman  Wilkerson : Or  the  time  will  come  when  you 
cease  to  function  properly  to  serve  the  public. 

Mr.  Insull:  Yes. 

(fiiairman  Wilkerson:  Now,  assuming  that  so  far  as 


25 


this  Board  is  concerned,  it  decides  the  matter  before  it 
according  to  the  law  and  values  property  as  the  law  re- 
quires it  to  value  it,  giving  consideration  to  all  the  ele- 
ments which  the  law  requires,  and  assuming  it  grants  a 
rate  of  return,  the  rate  which  it  is  obliged  under  the  law 
to  grant,  giving  consideration  to  all  the  elements  which 
are  to  be  considered,  have  you  any  concrete  suggestion 
as  to  how  the  raising  of  the  funds  necessary  for  these 
indispensable  enlargements  and  extensions  is  to  be  han- 
dled at  this  time,  whether  by  way, — if  I may  make  a 
suggestion — have  you  any  plan  worked  out  along  the  line 
of  a rate  large  enough  to  take  care  of  the  immediate  neces- 
sities with  provision  for  the  ultimate  return  of  that  out  of 
earnings. 

Mr.  Insull:  I think  an  institution  like  the  Common- 
wealth Edison  Company,  which  under  any  circumstances 
of  course  has  substantial  credit,  should  go  out  into  the 
market  and  borrow  the  necessary  money,  get  the  money 
for  the  purpose  and  obtain  it  for  as  long  a period  as  it 
can  economically  at  these  high  rates,  not  exceeding  five 
years,  backing  the  five  years  security  with  such  bonds  as 
they  may  be  able  to  get  by  authority  of  the  Commis- 
sion. 

I see  no  other  way  in  the  case  of  the  institution  whose 
credit  is  gone,  I see  no  other  way  than  for  it  to  be 
done  through  the  rate.  In  some  cases,  you  can  see  what 
we  were  able  to  do  with  the  Peoples  Gas  Light  & Coke 
Company,  raise  a very  large  sum  of  money  through  an 
outside  organization,  but  that  is  always  very  objection- 
able because  it  lays  the  management  open  to  the  criti- 
cism they  are  parties  to  some  inside  deal,  and  very  ob- 
jectionable from  the  position  of  a man  like  myself,  that 
is  the  only  other  way  you  can  do  unless  an  appeal  is 


26 


made  to  your  Commission  to  establish  rates  on  such  a 
basis  as  will  allow  enough  margin  to  provide  the  neces- 
sary money  for  absolutely  necessary  extensions.  The 
stopping  of  functioning  in  the  case  of  the  Gas  Com- 
pany is  to  my  mind  more  serious  than  any  other,  apart 
from  the  convenience  of  the  community,  because  of  the 
time  it  takes  to  start  up  again  and  the  loss  of  life  pos- 
sible in  starting  up,  and  next  to  that,  I presume  the 
transportation  is  the  most  important,  and  next  to  that  I 
presume  the  supply  of  energy.  Now  you  are  fortunate 
in  Chicago,  you  do  not  have  to  tax  the  customers  of  the 
utilities  in  their  rates  necessary  to  provide  the  money 
to  enable  them  to  function.  I see  no  other  way  to  do  it 
than  what  I would  call  the  smaller  investment  of  the 
Peoples  Gas  Light  & Coke  Company.  I see  no  other  way 
to  do  it  with  both  the  surface  and  elevated  transportation 
companies. 

Chairman  Wilkerson:  That  completes  what  you  have 
to  say? 

Mr.  Insull:  Yes,  sir.  I will  be  very  glad  to  be  at  the 
disposal  of  the  Commission  on  this  or  any  other  subject 
any  time  you  want  me  or  for  cross-examination. 

Chairman  Wilkerson:  We  may  desire  to  have  you  re- 
called, and  we  will  indicate  the  time  later. 

Mr.  Insull : I will  be  out  of  town  next  week. 

Chairman  Wilkerson:  If  there  is  a further  hearing 
and  it  is  now  obvious  we  will  not  get  through  today,  it 
will  be  some  time  the  week  after  next,  the  regular  Chi- 
cago week. 

Mr.  Cleveland:  We  will  desire  to  cross-examine  Mr. 
Insull. 

(Chairman  Wilkerson : You  will? 


27 


Mr.  Cleveland:  Yes,  sir. 

Chairman  Wilkerson : Very  well.  We  will  arrange  for 
the  time. 

B.  E.  Sunny,  a witness  herein,  having  been  first  duly 

sworn,  testified  as  follows: 

Chairman  Wilkerson:  You  may  proceed  with  your 
statement  following  the  outline  handed  to  Mr.  Insull. 

Mr.  Sunny:  Mr.  Chairman,  I agree  with  all  of  the 
statements  made  by  Mr.  Insull,  except  the  last  one  with 
reference  to  the  stopping  of  the  supply  of  gas  or  the 
traction  service.  I think  a more  serious  situation  would 
be  the  shutting  down  of  the  telephone  system  so  people 
could  not  talk. 

Chairman  Lucey : It  might  be  a good  thing  some  times. 

Mr.  Sunny:  We  have  been  developing  the  telephone 
service  pretty  fast  in  Chicago  during  the  past  ten  years. 
At  that  time  there  were  253,000  telephones  and  now  there 
are  557,000,  so  that  in  answer  to  your  question  as  to  the 
rate  of  growth  I would  say  that  it  has  been  during  the 
past  ten  years  41,500  telephones  a year. 

In  1918  the  growth  was  only  20,000  on  account  of  the 
war  condition,  but  in  1919,  the  war  having  ended,  we 
made  an  effort  to  clean  up  all  of  the  outstanding  orders 
and  we  put  in  62,500  telephones  in  that  year. 

The  total  addition  to  the  plant  in  the  ten  years,  as 
shown  by  the  books  was  $53,000,000  or  an  average  of 
$5,300,000  yearly  for  the  ten  years. 

In  1917  the  addition  was  $8,400,000. 

In  1918  it  was  $5,700,000,  and  in  1919,  $5,015,000. 


28 


The  rate  of  addition  ought  to  have  been  the  same  in 
1918  and  1919  as  in  1917,  and  we  have  suffered  recently 
very  much  from  shortage  in  facilities  because  the  six 
million  dollars  which  ought  to  have  been  spent  in  those 
two  years  could  not  be  because  of  the  condition  of  the 
market  for  labor  and  material. 

In  making  up  the  construction  program  for  1920,  some 
months  ago,  we  included  provision  for  providing  the 
spare  property  which  we  must  have  to  fill  orders  prompt- 
ly, and  planned  to  spend  eighteen  million  dollars  in  1920, 
but  after  several  weeks  it  was  plain  to  us  that  we  could 
not  possibly  spend  that  amount  in  a year  because  of  the 
market  for  labor  and  material,  so  we  cut  it  down  to  four- 
teen million  dollars,  and  then  later  on  reduced  it  to  ten 
million  five  hundred  thousand  dollars,  which  we  regarded 
as  the  minimum  amount  which  ought  to  be  spent. 

Having  added  62,500  stations  in  1919  we  had  exhausted 
about  all  of  the  spare  facilities  of  every  kind  that  we  had, 
both  in  the  city  and  in  the  country,  and  now  we  find  our- 
selves in  a condition  of  having  some  forty  thousand  un- 
filled orders  on  hand;  and  for  the  year  1920  it  would  be 
reasonable  to  estimate  that  if  we  could  go  on  the  old 
basis,  on  the  pre-war  basis,  we  could  easily  add  sixty 
thousand  telephones  in  the  city  and  ten  thousand  tele- 
phones in  the  suburban  division  or  a total  of  seventy 
thousand  in  1920. 

In  thirty-three  of  the  city  exchanges  twenty-one  of  the 
switchboards  are  almost  fully  loaded  so  that  there  are 
no  spare  facilities  for  new  subscribers. 

In  eleven  of  the  exchanges,  and  they  are  all  very  im- 
portant exchanges  too,  two  in  the  business  district  and 


.29 


nine  in  the  residence  district,  it  is  impossible  to  add  any 
subscribers  whatever.  That  same  condition  is  rapidly 
spreading  to  other  exchanges,  so  that  in  a very  short 
time  we  shall  not  have  any  spare  facilities  with  reference 
to  switchboard  at  all,  or  so  little  that  it  will  be  negli- 
gible. 

The  telephone  system  is  made  up  of  some  two  million 
miles  of  wire  in  a great  many  miles  of  cable,  both  under- 
ground and  aerial,  the  cables  carrying  from  fifty  pairs 
to  twelve  hundred  pairs  of  wires.  At  the  end  of  each 
cable  there  is  a terminal  board  where  the  wires  are 
brought  out  and  facilities  are  provided  to  connect  with 
the  wires  in  other  cables,  or  with  the  distributing  system. 

Now,  we  found  on  a recent  survey  in  twenty-four  per 
cent  of  those  terminals  there  are  no  spare  wires.  Ten 
per  cent  is  normal,  or  is  as  high  a percentage  as  should 
be  permissible  in  good  practice.  • 

Because  of  the  increased  traffic  in  the  city  and  outside 
the  number  of  trunk  lines  between  the  thirty  city  ex- 
changes is  insufficient  and  ought  to  be  materially  in- 
creased. 

In  the  toll  service,  to  points  forty  or  fifty  miles  from 
Chicago  and  to  points  within  that  distance  we  need  four 
hundred  and  fifty  additional  circuits,  but  the  pole  lines 
are  fully  loaded  and  additional  plant  can  be  provided 
only  with  aerial  cables,  requiring  complete  reconstruc- 
tion. 

Keferring  again  to  the  demands  for  service  in  Chicago, 
I said  that  we  had  about  forty  thousand  unfilled  orders 
on  hand. 


30 


The  possibilities  of  growth  in  the  telephone  service  in 
Chicago  is  rather  stunning.  There  seems  to  be  almost 
no  limit.  The  telephone  has  reached  a place  in  the  busi- 
ness and  domestic  routine  which  makes  it  indispensable. 
No  particular  argument  is  needed  on  that  point. 

We  find  that  there  are  620,000'  families  in  the  city  and 
that  there  are  334,000  residence  telephones.  In  some 
of  those  residences  there  is  more  than  one  telephone. 
I think  that  we  can  concede,  that  within  a brief  time, 
every  family  in  Chicago  will  have  to  have  a telephone. 

This  will  require  about  300,000  additional  telephones 
which  at  $200  apiece  will  call  for  about  $60,000,000. 

Then  there  are  88,000  business  firms  in  Chicago,  the 
annual  growth  in  business  telephones  will  probably  be 
fifteen  per  cent,  so  that  within  a short  time  it  will  easily 
take  one  hundred  million  dollars  to  take  care  of  the  de- 
velopment of  the  telephone  service  in  Chicago  without 
any  solicitation  whatever. 

With  respect  to  the  financing  of  the  telephone  work, 
when  we  fixed  on  a budget  of  ten  million  dollars  for  1920 
we  offered  several  banks,  acting  as  a syndicate,  an  issue 
of  ten  million  dollars  seven  per  cent  notes,  secured  by 
eleven  million  seven  hundred  thousand  dollars  five  per 
cent  first  mortgage  gold  bonds  of  the  company  maturing 
September  1,  1923,  and  received  a bid  therefor  which 
would  make  the  money  cost  the  Telephone  Company  nine 
per  cent. 

As  the  earnings  last  year  and  the  book  value  of  the 
property,  which  is  very  conservative,  very  much  under 
its  cost  of  production,  was  less  than  five  per  cent,  it  was 
obvious  that  the  company  could  not  get  anywhere  near 


31 


earning  nine  per  cent  on  the  new  money,  and  had  to 
decline  the  offer. 

The  incident  was  given  quite  a little  publicity,  and  as 
there  has  always  been  very  stiff  competition  between 
the  bond  houses  for  good  issues  of  bonds  we  rather  ex- 
pected that  we  would  have  some  offers  from  other  bond 
houses,  but  aside  from  one  inquiry  by  telephone,  no  one 
seemed  to  be  interested. 

There  is  nothing  particularly  significant  in  the  expe- 
rience of  the  Telephone  Company.  Other  issues  of  notes 
that  have  been  put  out  recently,  or  at  the  same  time,  have 
cost  the  issuing  company  nine  per  cent,  and  in  a number 
of  cases  a higher  rate  of  interest.  There  have  been  a 
good  many  expressions  of  surprise  about  this  high  rate 
of  interest  on  utility  securities  during  the  last  few  weeks, 
but  I think  after  all  we  ought  not  to  be  surprised  about 
it.  Increasing  the  rate  from  what  it  used  to  be,  five  and 
six  per  cent,  to  nine  per  cent,  amounts  to  an  increase  in 
the  wages  of  capital  which  like  the  wages  of  labor  were 
bound  to  go  up.  As  we  all  know  wages  and  food  and  cloth- 
ing and  the  cost  of  living  generally  have  doubled,  so  that  I 
think  it  is  reasonable  to  expect  that  the  cost  of  providing 
new  capital  for  utilities  and  for  industrial  purposes  will 
go  up  at  the  same  rate  as  fast  as  it  can  get  there,  and 
this  high  rate  will  probably  last  as  long  as  the  high  cost 
of  living  lasts. 

With  regard  to  the  question  as  to  the  time  element  in 
providing  plant  that  in  the  pre-war  days  a building  for 
a telephone  exchange  took  about  a year,  and  it  required 
another  year  from  the  time  the  building  was  finished 
until  the  switchboard  was  installed  and  put  in  service. 
Under  the  present  conditions  it  will  take  from  two  and  a 
half  to  three  years. 


82 


Commissioner  Funk:  You  said  there  were  about  forty 
thousand  unfilled  orders  to  fill,  I understand. 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Funk:  How  does  that  compare  with 
prior  to  1915? 

Mr.  Sunny:  It  is  about  three  times  larger  than  the 
old  normal  figure.  Forty  thousand  orders  are  made  up 
very  large,  I would  say  eighty  per  cent  for  the  low  priced 
telephones,  for  residence  purposes,  the  four  party  resi- 
dence telephones,  and  the  other  twenty  per  cent  for  the 
higher  class  of  residence  telephones  and  business  tele- 
phones. We  make  it  a point,  of  course,  to  fill  all  the  ap- 
plications for  business  telephones  just  as  quickly  as  it 
can  be  done,  because  a business  house  cannot  get  along 
without  the  service. 

Commissioner  Funk:  As  an  average,  how  long  after 
application  has  been  made  for  service  in  a residence,  how 
long  would  it  be  before  service  is  supplied? 

Mr.  Sunny:  It  used  to  take  about  ten  days,  but  in 
some  cases  now  it  will  be  two  years  before  we  can  fill 
some  orders. 

Commissioner  Funk : It  depends  upon  the  exchange  to 
which  that  phone  would  have  to  be  attached? 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Shaw:  Mr.  Sunny,  have  you  made  any 
investigation  to  ascertain  what  industries  that  might  be 
considered  sound  financially  have  to  pay  for  money  at 
the  present  time,  those  that  are  not  subject  to  regula- 
tions? 


33 


Mr.  Sunny:  I know  only  in  a general  way,  Mr.  Com- 
missioner. I have  not  made  any  special  inquiry.  I have 
only  the  same  sources  of  information  that  have  been  open 
to  all  of  us,  but  I have  looked  over  the  reports  with  a 
great  deal  of  care  and  interest,  and  I find  that  some  in- 
dustries are  able  to  get  money  a little  cheaper  than  the 
utilities.  Others,  not  so  well  known,  are  paying  a little 
more. 

Commissioner  Lucey : It  is  not  entirely  a shortage  of 
money,  as  I judge,  from  the  fact  that  you  have  changed 
your  appropriation.  There  are  other  conditions  that 
affect  your  ability  to  do  your  construction  work.  Is  that 
the  shortage  of  labor  I 

Mr.  Sunny:  Of  course  the  war  condition  is  at  the 
bottom  of  the  whole  trouble,  and  in  our  business  it  mani- 
fested itself  in  three  ways.  It  cut  off  the  expenditure  of 
six  million  dollars  which  we  otherwise  would  have  had  to 
spend  in  1918  and  1919  for  additional  facilities,  because 
we  could  not  at  that  time  get  the  labor  or  material ; then 
there  has  been  an  excessive  demand  for  telephone  serv- 
ice, more  active  than  at  any  time  in  the  past  ten  years, 
and  now  on  top  of  those  two  other  things,  we  have  the 
very  high  cost  of  money. 

Commissioner  Lucey:  Even  if  you  had  the  money,  if 
the  money  was  not  so  expensive,  or  if  you  were  willing  to 
pay  the  cost  and  could  get  it,  isnl  it  true  as  a result  of 
the  shortage  which  followed  the  lack  of  production  dur- 
ing the  year  or  two  of  the  war,  now  in  the  effort  to  catch 
up  with  that  there  is  necessarily  going  to  be  a shortage 
of  the  supply  until  such  time  as  that  supply  can  be  filled 
and  you  get  back  to  operating  at  normal? 

Mr.  Sunny:  Yes,  sir. 


84 


Commissioner  Lucey:  And  therefore  you  cannot  sup- 
ply the  demand  partly  for  that  reason,  and  the  money 
market  may  not  be  altogether  to  blame? 

Mr.  Sunny:  The  money  is  important,  of  course,  but 
if  we  had  it  all  in  the  bank — to  our  credit  we  could  only 
use  it  just  so  fast,  and  that  would  be  rather  slow  on  ac- 
count of  the  labor  and  material  market. 

Chairman  Wilkerson:  How  much  of  this  work  of  en- 
largements and  extensions  that  you  have  referred  to, 
do  you  regard  as  absolutely  indispensable  if  your  com- 
pany is  to  continue  to  serve  the  public? 

Mr.  Sunny ; I would  say  *in  answer  to  that  question 
that  it  is  extremely  important  that  the  Telephone  Com- 
pany spends  twenty  million  dollars  just  as  fast  as  it  can 
be  sensibly  and  satisfactorily  spent. 

Chairman  Wilkerson:  What  is  your  solution  about 
getting  the  twenty  million  ? 

Mr.  Sunny:  It  would  be  useless  at  this  time  to  attempt 
to  get  more  than  ten  million,  because  that  is  all  we  can 
spend  in  the  next  twelve  months,  if  we  can  spend  that 
much. 

Chairman  Wilkerson:  You  have  not  got  that  yet? 

We  have  not  got  that  yet,  and  unless  there  is  an 
improvement  in  the  market  conditions  so  that  money  can 
be  had  for  very  much  less  than  nine  per  cent,  the  only 
‘Solution  is  in  a general  increase  in  rates  which  will  give 
a telephone  company  a revenue  which  will  permit  it  to 
pay  the  high  interest  rate. 

Chairman  Wilkerson:  Did  you  have  in  mind  if  pro- 


35 


vision  was  made  in  rates  for  money,  to  make  these  abso- 
lutely indispensable  extensions,  that  there  should  be  some 
plan  by  which  ultimately  that  would  he  taken  care  of  in 
the  capital  account  in  the  proper  way  and  would  be  re- 
turned to  the  earnings  of  the  company  which  would  be 
considered  in  determining  what  is  a fair  rate  of  return 
in  the  future? 

Mr.  Sunny:  I think  it  would  be  entirely  possible  and 
practicable  for  the  Commission  to  make  the  rates  as  high 
as  might  be  asked  for  by  any  utility,  because  after  all  it 
is  not  a matter  of  money  now.  It  is  a matter  of  supply- 
ing the  service  at  all,  and  the  service  is  the  most  im- 
portant thing.  I think  the  utilities  are  in  such  a condi- 
tion that  they  ought  to  be  given  carte  blanche  to  do  pretty 
much  as  their  judgment  dictates,  to  get  the  properties 
up  to  the  highest  efficiency  in  every  way.  The  tendency 
has  been  all  over  the  country  with  reference  to  Commis- 
sions and  courts  and  city  councils  having  rate  jurisdic- 
tion, and  I say  this  without,  of  course,  any  offense  what- 
ever— 

Chairman  Wilkerson:  You  cannot  hurt  our  feelings. 

Mr.  Sunny:  To  see  how  far  the  utility  can  go  and 
live  at  all,  and  we  have  been  experimented  with  at  a tre- 
mendous clip,  and  are  in  a desperate  plight.  I think  it 
would  not  be  going  too  far  to  ask  that  we  be 
given  a free  rein  for  a considerable  period,  with  the  one 
limitation,  that  we  don  ot  pay  any  higher  dividends  on 
outstanding  stock  than  we  are  now  paying,  or  declare  any 
extra  dividends,  then  if  after  a period  of  two  or  three 
years  it  is  found  that  the  high  rates  produce  a larger 
revenue  than  is  necessary,  such  larger  revenue  will  be 
found  in  the  surplus  of  the  company,  and  the  rates  can  be 


36 


readjusted.  Utility  corporations  are  not  here  for  the  day 
only.  They  are  permanent.  Each  one  of  them  will  last 
as  long  as  the  City  of  Chicago,  so  that  I think  it  is  only 
fair  to  let  them  once  in  a while  outline  the  basis  on 
which  they  think  they  can  do  business,  and  better  serve 
the  public. 

Commissioner  Lucey:  There  is  not  any  shortage  of 
money  in  the  country,  is  there? 

Mr.  Sunny:  Yes,  sir,  I think  there  is. 

Commissioner  Lucey:  As  compared  with  the  pre-war 
period? 

Mr.  Sunny : There  is  a very  much  larger  quantity  but 
the  demand  is  greater. 

Commissioner  Lucey : The  demand  is  proportionately 
larger. 

Mr.  Sunny:  Yes. 

Commissioner  Lucey:  But  there  is  a larger  quantity 
in  money? 

Mr.  Sunny : I think  there  is. 

Commissioner  Lucey:  Since  the  passage  of  the  Fed- 
eral Reserve  Act  any  way  money  is  a little  hit  easier  to 
get  than  before,  under  certain  conditions? 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey:  There  is  apparently  no  great 
difficulty  in  these  industrial  concerns  financing  them- 
selves, judging  from  the  number  of  their  securities  that 
are  being  offered  on  the  market,  is  that  your  viewpoint? 

Mr.  Sunny : That  is  my  observation  too,  and  of  course 
the  answer  to  that  is  they  can  pay  any  price  that  is  asked 


37 


for  money  because  they  can  add  the  higher  rate  of  inter 
est  to  the  production  of  their  factory  or  enterprise. 

Commissioner  Lucey:  Well,  in  looking  over  the  list  I 
see  the  industrials  along  here  running  at  a yield  at  least 
comparable  to  that  which  some  of  the  utilities  are  offer- 
ing their  stock.  I judge  from  the  newspaper  reports  that 
the  industrials  are  securing  the  money  which  is  being  in- 
vested at  the  present  time,  at  least  I imagine  that  is  the 
viewpoint  that  you  have'? 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey : That  the  money  is  going  into  in- 
dustrials as  against  utilities. 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey:  Now,  in  the  case  of  the  Chicago 
Telephone  Company,  Mr.  Sunny,  its  credit  is  as  good  as 
that  of  any  industry  in  the  City  of  Chicago  I 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey:  It  should  be? 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey:  Never  passed  any  dividend — 
the  management  is  not  criticised,  its  condition  on  the 
whole  is  good,  and  the  question  presents  itself  as  to  why 
its  securities  are  not  being  taken.  Is  it  a matter  of  prej- 
udice in  the  mind  of  the  public  who  buy  the  securities 
or  is  it  that  you  have  difficulty  in  convincing  the  gentle- 
man through  whom  you  have  to  present  those  securities 
to  the  public  that  utility  securities  should  be  taken?  In 
other  words  is  it  prejudice  now  in  the  mind  of  the  gen- 
eral public  or  is  it  lack  of  enthusiasm,  to  talk  plain  as 
Mr.  Insull  suggested  a while  ago,  on  the  part  of  the  in- 
vestment bankers  who  are  the  medium  of  exchange,  as  it 
were,  between  the  utility  corporation  and  the  public? 
Are  they  the  ones  that  dislike  to  take  the  securities  ? 


38 


Mr.  Sunny:  I think  that  the  fashions  change  with  ref- 
erence to  securities  as  in  everything  else.  Sometimes  the 
market  is  for  railroad  securities,  sometimes  for  utility 
securities,  and  sometimes  the  market  is  for  industrials. 
In  the  past  two  years,  and  growing  out  of  the  war  con- 
ditions the  popularity  has  all  gone  to  the  industrials  and 
the  railroads  and  utilities  have  been  in  the  background. 

The  utilities  all  over  the  country  are  in  the  same  con- 
dition with  reference  to  the  attitude  of  the  public  as  in 
Chicago. 

Mr.  Insull  spoke  of  the  fact  that  the  Chicago  Telephone 
Company  was  largely  owned  in  the  east  by  the  American 
Telephone  & Telegraph  Company.  That  company  has  a 
very  large  issue  outstanding  of  eight  per  cent  common 
stock  which  has  paid  dividends  at  that  rate  for  a great 
many  years.  The  company  is  of  unquestioned  financial 
standing  and  its  stock  is  selling  at  ninety-five  or  about 
ten  points  under  the  Commonwealth  Edison  Company 
stock  paying  the  same  rate  of  dividends. 

Commissioner  Lucey:  Its  bonds  are  being  offered  to 
net  7.90%? 

Mr.  Sunny:  Yes,  sir. 

Commissioner  Lucey:  This  prejudice  that  the  ques- 
tion of  popularity  of  the  securities, — that  the  fashions 
change, — to  use  your  own  expression,  the  idea  in  the  mind 
of  the  public,  the  investing  public,  is  what  are  good  se- 
curities and  bad  securities,  and  the  popularity  of  one 
class  as  against  another  is  not  a result  of  accident,  of 
course.  It  is  a result  of  education  or  propaganda,  or 
something  else,  which  convinces  the  investor  instead  of 
buying  A.  T.  & T.  bonds,  or  stocks  of  the  Chicago  Tele- 
phone Company,  or  the  Commonwealth  Edison  Company 
or  some  other  regulated  utility,  that  he  better  put  his 


39 


money  in  some  of  these  industrials  which  are  quoted  at 
about  the  same  price? 

Now,  that  is  because  he  thinks  so.  There  has  some- 
thing occurred  to  make  him  think  so,  and  it  seems 
to  me  that  the  utility,  such  as  your  own,  using  that  as 
an  illustration,  ought  to  have  no  difficulty  in  convincing 
the  public  in  and  about  Chicago  that  its  securities  are 
desirable,  that  the  property  back  of  the  investment  is 
sound,  that  the  security  ought  to  be  readily  marketable, 
if  it  is  not  anything  else  than  the  education  of  the  public! 

Mr.  Sunny:  It  seems  to  be  not  so  much  a question  of 
credit  of  the  individual  company,  but  association. 

Chairman  Wilkerson:  You  are  in  bad  company! 

Mr.  Sunny:  We  are  all  classed  together.  If  Mr.  In- 
sult could  make  it  plain  to  all  the  people  in  Chicago  how 
strong  his  company  is,  how  well  managed  it  is,  what  con- 
servative capitalization  it  has,  the  stock  would  probably 
go  back  to  the  old  figure  of  125  or  130.  If  we  could  reach 
all  of  the  people  who  are  interested  in  the  bonds,  in  our 
bonds,  and  they  are  for  the  most  part  owned  in  and 
around  Chicago,  some  nineteen  million,  if  we  could  make 
them  feel  confident  that  nothing  could  possibly  happen, 
and  that  in  1923  they  will  get  one  hundred  cents  on  the 
dollar  in  cash  for  their  bonds  and  get  their  interest  in 
the  meantime  those  bonds  would  not  be  selling  at  90  now, 
but  would  be  selling  at  par,  but  it  is  impossible  to  reach 
those  people  and  they  are  frightened.  They  are  not  prej- 
udiced so  much  as  they  are  frightened.  There  is  a uni- 
versal fright  with  reference  to  utility  securities  all  over 
the  United  States.  Everybody  believes  in  the  great  serv- 
ice they  are  performing,  but  they  are  afraid  to  have  any- 
thing to  do  with  the  utility  in  a financial  way  because  it  is 
subject  to  regulation,  and  that  regulation  they  think  is 


40 


very  often  influenced  by  political  considerations ; further- 
more there  is  not  a satisfactory  public  sentiment  behind 
the  rate  making  body  which  will  enable  rates  to  be  made 
that  are  just  and  fair. 

Commissioner  Lucey:  That  is,  the  investing  public 
do  not  think  the  Utilities  Commission  will  give  the  util- 
ity a suflilcient  rate  of  return  to  make  the  investments 
desirable! 

Mr.  Sunny:  I think  there  is  much  feeling  of  that 
kind. 

Commissioner  Lucey:  Of  course  the  public  at  large, 
according  to  the  newspapers,  have  been  thinking  the 
Commissions  have  been  granting  too  high  rates,  to  the 
utilities. 

Another  thing,  I note  that  the  municipal  bonds  are 
running  about  the  same  rate  that  they  were  proportion- 
ately before.  Is  that,  in  your  opinion,  altogether  by  rea- 
son of  the  fact  that  they  are  not  subject  to  certain  taxes 
that  other  bonds  are  subject  to! 

Mr.  Sunny : I think  some  of  the  bankers  or  bond  peo- 
ple would  be  more  competent  to  answer  that  question. 

I think  that  the  reason  that  you  have  intimated  is  the 
true  one,  tax  exempt  features  and  the  general  return  can 
be  had  on  a purchase  of  that  class  of  bonds,  especially 
government  bonds. 

Commissioner  Shaw : Mr.  Sunny,  I wondered  at  times 
if  perhaps  the  better  operating  utilities  could  obtain 
money  under  favorable  conditions  as  some  of  the  bet- 
ter industries. 

For  example,  I have  now  before  me  a newspaper  ad- 
vertisement of  the  Associated  Simmons  Hardware  Com- 
pany. Their  gold  notes  now  are  being  offered  to  the  pub- 


41 


lie  in  Chicago  through  Halsey,  Stuart  and . Continental 
and  Commercial  National  Bank.  Now,  the  advertise- 
ment sets  forth  their  net  assets  are  three  times  these  gold 
notes  offered,  and  also  further  sets  forth  that  the  net 
earnings  are  four  times  the  interest  charges. 

As  I understand  the  rule  laid  down  by  the  bankers 
that  ought  to  be  gilt  edge  in  an  industry  not  subject  to 
regulation.  Now  they  are  offered  on  a basis  of  seven  and 
a half  per  cent.  At  the  same  time  there  is  offered  for 
sale  here  in  Chicago,  through  the  Illinois  Trust  & Sav- 
ings Bank  and  Halsey  Stuart  and  Company,  a portion  of 
the  twenty-five  million  dollars,  seven  per  cent,  converti- 
ble notes  of  the  Southwestern  Bell,  a subsidiary  of  the 
American  Telephone  and  Telegraph  Company.  I as- 
sumed the  Chicago  Telephone  Company  was  as  strong 
financially  as  the  Southwestern  Bell,  and  that  is  offered 
on  the  basis  of  seven  and  six-tenths  per  cent,  or  substan- 
tially the  same.  Those  two,  in  other  words,  are  about  on 
a par  as  to  the  cost  of  financing  themselves.  Maybe 
there  are  other  troubles  beyond  what  you  gentlemen  have 
in  mind.  In  other  words,  the  money  market  has  got  up 
to  the  level  now  where  it  is  on  an  eight  or  nine  per  cent 
basis  for  all  those  that  need  to  obtain  funds? 

Mr.  Sunny:  They  are  pretty  much  alike,  Mr.  Com- 
missioner. The  price  to  the  public  seems  to  be  about 
seven  and  a half  per  cent,  and  the  price  to  the  issuing 
company  from  nine  per  cent  up. 

Chairman  Wilkerson:  That  is  all. 

Mr.  Cleveland:  We  desire  to  cross-examine  Mr.  Sunny. 

Chairman  Wilkerson : The  same  understanding.  You 
may  have  the  same  understanding  with  all  the  witnesses. 


42 


Henry  A.  Blair,  a witness  herein,  having  been  previously 

sworn,  testified  as  follows: 

Chairman  Wilkerson:  Have  you  the  question  that 
was  submitted  by  Mr.  Bangs  before  you,  Mr.  Blair? 

Mr.  Blair:  I received  that  just  this  morning,  and  I 
am  not  prepared  to  give  the  actual  figures,  but  I think 
I can  answer  the  questions  here  substantially  correct. 

Chairman  Wilkerson:  I take  it,  for  the  purpose  of 
the  particular  case  pending  before  the  Commission,  the 
exact  figures  are  in  the  record? 

Mr.  Blair:  Yes. 

Chairman  Wilkerson:  It  is  more  a statement  of  the 
general  facts  and  whatever  representations  you  care  to 
make  to  the  Commission  along  the  line  of  the  questions. 

Mr.  Blair:  I think  all  of  the  statements  that  have 
been  submitted  to  the  Commission,  I think,  would  answer 
fully  the  questions  that  are  brought  up  there  in  this 
paper,  but  I think  I am  prepared  to  answer  the  questions 
approximately  correctly. 

The  normal  growth  of  these  properties  has  been  on  an 
average  of  for  a number  of  years  based  on  two  or  three 
per  cent  of  the  riders,  car  riders,  which  represents  the 
revenue  entirely  of  the  traction  property.  It  is  the  rider 
who  gives  them  their  revenue,  and  they  have  no  other 
means  of  providing  it  in  any  way. 

The  statements  that  were  made  by  the  two  witnesses, 
Mr.  Sunny  and  Mr.  Insull  on  the  general  situation  I con- 
cur in  fully,  and  it  applies  to  our  property  as  well  as  to 
theirs,  only  to  a very  much  greater  extent,  because  our 
condition  as  transportation  property  is  rather  in  a dif- 
ferent situation  and  different  manner  and  way  of  creat- 
ing revenue. 


43 


During  the  last  ten  years  in  regard  to  the  demand  for 
extensions  and  so  forth,  from  1908  up  to  the  present  time 
the  Surface  Lines  have  spent  in  the  construction,  exten- 
sions, betterments  and  so  forth,  one  hundred  million  dol- 
lars, or  for  a period  of  practically  up  to  1917,  which  is 
the  time  the  last  bonds  were  sold,  the  amount  was  in 
the  neighborhood  of  about  $85,000,000.  The  last  few 
years  the  only  means  has  been  by  loans  and  what  little 
receipts  that  we  might  get  along  with  to  take  care  of  the 
city  requirements  wherever  they  make  street  improve- 
ments and  so  forth,  where  they  are  necessary  every  year 
under  almost  any  conditions.  Our  ability  at  the  present 
time  to  finance  extensions,  equipment,  and  so  forth,  I 
would  say  on  the  return  that  we  were  receiving  is  impos- 
sible. I have  taken  this  up  with  the  banking  interests 
and  people  in  the  past  who  have  furnished  this  one  hun- 
dred million  dollars  and  they  see  no  way  excepting  by  a 
better  return  than  we  are  receiving  at  the  present  time. 
It  is  a question  of  credit  entirely,  I think ; in  fact  I know, 
whether  we  can  or  cannot  make  extensions,  get  equip- 
ment, and  go  along  with  these  properties.  The  necessity 
is  very  great.  I would  say  that  this  property  at  the  pres- 
ent time  could  spend  from  fifteen  to  twenty  million  dol- 
lars, which  would  be  a benefit  to  the  public  and  add  an 
earning  power  to  the  company  properties  themselves. 

There  has  been  such  a tremendous  increase  in  cost, 
and  our  revenue  like  most  public  utilities  is  standard- 
ized. While  the  cost  has  gradually  gone  up  and  gone  up, 
the  means  or  rates  that  we  receive  have  practically  been 
wiped  out,  and  I can  see  nothing  but  a calamity  if  that 
situation  should  continue  for  any  great  time. 

I cannot  conceive  of  a city  like  Chicago  being  de- 
prived of  transportation,  and  I cannot  conceive  of  peo- 


44 


pie  generally  attacking  and  trying  to  destroy  rather  than 
to  give  the  opportunity  to  increase  and  extend.  They 
have  had  no  opportunities  in  the  period  of  the  war.  Con- 
ditions have  been  created  here  through  no  fault  of  man- 
agement, no  fault  of  any  human  beings  that  are  operating 
public  utility  properties,  or  any  other  properties.  I 
think  the  City  of  Chicago,  in  the  next  ten  years,  should 
have  to  spend  in  transportation  not  less  than  one  hun- 
dred and  fifty  million  dollars  to  give  it  what  they  should 
have  and  to  take  care  of  the  people. 

During  the  month  of  March  we  carried  on  an  average 
every  day  3,700,000  passengers.  That  includes  revenue 
passengers  and  transfer  passengers. 

Commissioner  Lucey:  You  are  speaking  only  of  the 
Surface  Lines? 

Mr.  Blair:  I am  speaking  only  of  the  Surface  Lines; 
the  requirements  for  this  property  I would  say  today 
should  have  not  less  than  three  to  four  hundred  addi- 
tional cars. 

Chairman  Wilkerson : Is  that  the  very  lowest  number 
that  will  enable  you  to  handle  the  traffic  in  Chicago  ? 

Mr.  Blair:  I think  so. 

Chairman  Wilkerson:  Three  to  four  hundred. 

Mr.  Blair:  Yes,  sir. 

Chairman  Wilkerson:  Yes.  Increase? 

Mr.  Blair:  Yes,  sir.  The  cars  that  represent  3,158 
cars  on  our  system  stands  in  the  capitalization  at  $6,700 
a car.  The  specifications  for  the  same  car  submitted  to 
the  car  builders,  they  asked  over  $15,000  for  the  same 
car,  the  identical  same  car.  Four  hundred  cars,  you  will 
see,  will  cost  us  six  million  dollars. 

The  extensions,  the  necessary  improvements  and  so 


45 


forth  we  could  easily  spend  ten  million  dollars  if  we  had 
it  at  this  present  time.  It  is  a question  entirely  of  credit. 
The  Traction  Companies  or  the  transportation  companies 
of  any  city  in  this  country  rely  entirely  on  the  rider,  and 
when  the  cost  has  gone  up  to  a point  where  you  meet  that, 
our  resources  and  our  credit  have  gone.  You  have  got  to 
build  that  up  or  we  never  can  construct  or  take  care  of 
the  people  that  we  are  asked  to  give  service. 

I do  not  know  but  that  answers  most  of  the  points  that 
are  here,  Mr.  Chairman.  I do  not  think  there  is  anything 
else  that  I have  to  say.  It  has  been  so  thoroughly  cov- 
ered by  Mr.  Sunny  and  Mr.  Insull  in  a general  way. 

Chairman  Wilkerson : What  are  you  going  to  do  about 
those  two  hundred  cars,  Mr.  Blair? 

Mr.  Blair:  We  will  simply  have  to  hope  for  them. 
That  is  the  only  thing  that  is  left  for  us. 

Chairman  Wilkerson:  Well,  what  effort  have  you 
made  to  get  them? 

Mr.  Blair:  Mr.  Chairman,  we  have  made  or  used  every 
effort  possible.  We  have  tried  to  handle  the  cars 
through  the  car  company,  and  so  far  it  is  impossible. 
The  cost  is  so  great  the  companies  are  unable  to  do  it, 
we  cannot  finance  it. 

Chairman  Wilkerson:  You  cannot  get  the  money? 

Mr.  Blair:  We  cannot  get  the  money.  We  could  not 
sell  a bond  today  at  any  price.  It  is  not  a question  of 
what  the  rate  is.  We  could  not  sell  it  at  all  as  long  as 
our  return  stands  as  it  is.  We  have  got  to  get  costs.  We 
have  got  to  take  care  of  all  of  our  obligations.  We  have 
got  to  get  sufficient  to  take  care  of  the  requirements  for 
a few  years  ahead  and  we  have  got  to  give — get  sufficient 
to  show  the  bankers  and  investors  that  they  are  going  to 
get  their  principal  and  their  interest. 

Chairman  Wilkerson:  I think  that  is  all,  Mr.  Blair. 


E.  D.  Hulbekt,  a witness  herein,  having  been  first  duly 

sworn,  testified  as  follows : 

Chairman  Wilkerson:  I will  read  the  outline,  the 
question  which  has  been  submitted  by  Mr.  Bangs  to  be 
answered  at  this  hearing,  which  is  the  following: 

1.  What  is  the  situation  with  reference  to  the  demand 
for  capital  by  industrial  concerns  and  public  utilities? 

What  are  the  present  interest  rates  for  permanent 
financing  and  what  rate  of  return  must  utility  properties 
earn  to  attract  new  capital? 

2.  Would  living  conditions  and  the  general  business 
situation  in  Chicago  be  affected  by  the  inability  of  the 
public  utilities  to  secure  capital  for  extensions  and  bet- 
terments ? 

With  that  outline,  will  you  proceed  to  answer  the  ques- 
tion? 

Mr.  Hulbert : I will  not  be  able  to  say  very  much  ex- 
cept a repetition  of  what  has  been  said  here.  I do  not 
know  as  I understand  exactly  what  is  the  situation  with 
reference  to  demand  for  capital  by  industrial  concerns 
and  public  utilities. 

Chairman  Wilkerson:  I think  perhaps  for  the  record 
you  had  better  have  Mr.  Hulbert  state  the  bank  with 
which  he  is  connected. 

Mr.  Bangs:  Yes,  the  record  ought  to  show  that. 

Chairman  Wilkerson:  Will  you  interrogate  him  for 
a few  questions? 

Mr.  Bangs : Mr.  Hulbert,  will  you  state  very  briefly 
your  banking  experience  in  Chicago,  and  the  banks  with 
which  you  are  connected  now  and  in  what  capacity? 


47 


Mr.  Hulbert:  I have  been  in  Chicago  about  25  years, 
been  during  that  time  vice-president  and  president  of  the 
Merchants  Loan  & Trust  Company;  at  the  time  being  I 
am  also  president  of  the  Illinois  Trust  and  Corn  Ex- 
change National  Banks. 

Mr.  Hulbert:  Now,  I think  perhaps  I ought  to  dis- 
agree with  some  opinions  that  have  been  suggested  here, 
that  there  is  plenty  of  money  to  go  around,  it  is  only  a 
question  of  credit,  that  is  not  the  fact.  There  is  a greater 
shortage  of  capital  just  now,  greater  difficulty  in  obtain- 
ing credit  than  there  has  been  any  time  in  the  last  fifteen 
years.  That  is  one  part  of  this  situation  that  ought  to 
be  borne  in  mind. 

Bankers,  investment  bankers,  especially,  are  discrimi- 
nating very  carefully  about  what  kind  of  offerings  they 
make  just  at  present.  1 think  I ought  to  say  there  has 
been  a change  in  that  respect  within  the  last  few  weeks. 
There  is  a very  strong  feeling  among  bankers  that  no 
new  issues  should  be  put  out,  industrial  or  utilities  or 
railroad,  unless  there  is  an  absolute  necessity  for  that 
issue. 

We  object  decidedly  to  having  issues  put  out  for  the  ’ 
purchase  of  new  property  or  anything  else  except  some 
essential  need  of  that  concern. 

' It  is  quite  true,  as  Mr.  Sunny  suggested,  that  the  price 
of  money  has  gone  up  without  regard  to  the  monetary 
conditions.  The  price  of  money  is  higher  now  than  it 
was.  It  has  gone  up  with  everything  else,  and  neces- 
sarily so.  We  have  got  to  get  accustomed  to  new  figures. 
We  used  to  have  a feeling  that  six  per  cent  was  about 
the  limit  that  a solvent  concern  in  good  standing  ought 
to  pay.  That  time  has  gone  by. 

I had  some  figures  made  this  morning  for  my  own 


48 


information,  some  of  it  is  new  to  me  and  perhaps  would 
be  to  the  Commission,  but  I wanted  to  ascertain  the  pres- 
ent market  return,  rate  of  return  on  first  mortgage  utility 
bonds  in  Chicago,  as  far  as  we  are  able  to  get  them. 

First  on  the  list,  is  the  Chicago  City  Eailway,  first 
mortgage  5’s,  due  in  1927,  bid  65^,  asked  66^.  That  is 
about  a 12|  basis  return  for  first  mortgage  of  the  City 
Railway.  Ten  years  ago  we  thought  that  was  the  best 
utility  bond  that  had  ever  been  put  out  anywhere.  Of 
course  it  goes  without  saying  that  that  company’s  credit 
at  present  is  practically  nothing.  When  its  first  mort- 
gage is  selling  about  12.75  basis  there  is  no  use  in  that 
company  trying  to  do  any  financing,  it  is  out  of  the  ques- 
tion. 

Chicago  Railways  Company,  for  some  reason  the  first 
mortgage  bonds  are  not  quite  as  saleable  as  the  others. 
Their  bonds  are  selling  at  the  present  time  or  offered  at 
the  present  time  on  a fourteen  per  cent  basis.  The  same 
situation  applies  to  them,  of  course. 

The  Commonwealth  Edison  Company  first  mortgage 
5’s  are  selling  on  about  a seven  per  cent  basis.  That 
is  a very  fine  security  and  perhaps  it  is  a good  indica- 
tion, a good  criterion  of  what  the  market  is  for  the  very 
highest  class  of  utility  bonds  at  the  present  time. 

The  Chicago  Telephone  Company  first  mortgage  bonds 
bid  90,  asked  90f.  That  is  about  8.8  basis,  practically 
nine  per  cent  basis. 

Mr.  Sunny,  I noticed  expressed  some  surprise  that  the 
bankers  made  a rate  of  nine  per  cent  on  his  ten  million 
dollars  of  notes.  A banker,  gentlemen,  is  only,  as  the 
Commissioner  suggested,  an  intermediary  between  the 
borrower  and  the  public.  We  have  to  consider  what  these 
notes  will  sell  at. 


49 


Now,  we  are  immediately  confronted  by  this  situation : 
Here  is  a first  mortgage  bond  of  the  Chicago  Telephone 
Company  selling  on  a nine  per  cent  basis.  What  argu- 
ment can  be  made  to  sell  an  unsecured  note  on  a better 
basis  than  that,  or  buy  an  unsecured  note  on  a better 
basis  than  that. 

The  Elevated  Roads,  of  course,  are  hardly  worth  con- 
. sidering.  The  Metropolitan  and  West  Side  seems  to  be 
selling  on  about  an  eleven  per  cent  basis,  and  the  South 
Side  over  sixteen  per  cent  basis.  They  are,  of  course, 
out  of  the  pale  when  it  comes  to  the  consideration  of 
finances. 

The  Peoples-  Gas  Light  & Coke  Company  refunding 
mortgage  5’s  are  selling  on  about  a nine  and  a quarter 
basis. 

Mr.  Insull  said  he  would  consider  ten  per  cent  today 
a fair  rate  for  tliat,  but  he  knows  he  cannot  borrow 
money  for  the  Gas  Company  at  any  rate.  The  Gas  Com- 
pany has  no  credit.  It  could  not  borrow  it  at  ten  or  fif- 
teen or  twenty  per  cent  probably. 

Now,  the  next  question,  what  are  the  present  interest 
rates  for  permanent  financing.  I suppose  that  means 
permanent  financing  of  concerns  in  good  credit.  I think 
it  has  been  brought  out  here  pretty  thoroughly  some- 
where that  somewhere  from  seven  to  nine  per  cent  is 
about  what  it  cost.  The  securities  must  be  offered  to  the 
public  on  about  a seven  per  cent  basis.  You  cannot  sell 
it  on  any  better  than  that. 

I think  perhaps,  I ought  to  state  that  one  of  the  diffi- 
culties in  financing  of  these  matters  now  has  arisen  out 
of  the  income  tax.  The  large  investors  we  used  to  de-‘ 
pend  on  to  absorb  these  securities  do  not  buy  them  at 
all  now.  They  would  not  even  buy  them  on  a seven  or 


/ 


50 


eight  per  cent  basis.  They  cannot  afford  to.  The  men 
with  large  incomes  whose  income  tax  now  runs  from 
thirty  to  forty  per  cent  used  to  be  the  large  purchasers 
of  these  securities.  Now,  of  course,  a man  cannot  atford 
to  buy  seven  or  eight  per  cent  securities  if  lie  has  to  pay 
forty  per  cent  tax,  when  he  can  buy  government  securi- 
ties on  pretty  nearly  a six  i^er  cent  basis,  or  municipal 
bonds,  which  are  tax  exempt. 

Chairman  Wilkerson:  They  are  selling  these  securi- 
ties and  re-investing? 

Mr.  Hulbert:  Yes,  they  are  doing  that,  and  that  has 
affected  this  whole  situation  very  seriously. 

The  next  question  is  what  rate  of  return  must  utility 
properties  earn  in  order  to  attract  new  capital.  I notice 
Mr.  Insull  dodged  that  question  and  put  it  up  to  the  Com- 
mission. The  only  suggestion  I want  to  make  is  that  I 
assume  the  Commission  will  all  agree  that  we  ought  to 
come  to  a condition  where  financing  can  be  done  by  the 
sale  of  stock ; we  have  got  away  from  that  as  a temporary 
expedient.  We  talk  about  three  or  four  year  notes  as 
permanent  financing.  That  is  not  permanent  financing. 
It  is  very  temporary  and  very  unsound.  Conditions  are 
going  to  be  worse  probably  then  than  it  is  now  in  many 
respects. 

Now,  assuming  that  the  present  market  price  for 
money  is  seven  or  eight  per  cent,  at  least,  you  cannot 
induce  any  investor  to  put  money  into  the  stock  of  a 
utility  unless  it  is  earning  more  than  that.  No  industrial 
concern  could  get  bank  credit  today  unless  it  was  earn- 
ing considerably  more  than  ten  per  cent.  Anything 
under  ten  per  cent  would  be  considered  a poor  showing 
for  an  industrial  concern,  but  of  course  none  of  us  want 
to  see  utilities  permitted  to  earn  any  more  than  is  neces- 


51 


sary  to  establish  a decent  credit.  They  should  not  be 
permitted  to  earn  what  industrial  concerns  do,  because 
they  are  protected  and  are  practically  a monopoly,  and 
when  people  are  ^ven  a monopoly  they  ought  to  be  regu- 
lated. We  all  agree  to  that.  But  I do  not  see  how  you 
can  attract  capital  to  stock  issues  of  utilities,  and  that 
is  the  only  decent  financing  that  can  be  done,  and  that  the 
banks  have  nothing  to  do  with,  unless  they  can  show  a 
return  of  ten  per  cent. 

The  next  question,  would  the  general  business  and  do- 
mestic situation  in  the  City  of  Chicago  be  affected  by  the 
inability  of  its  public  utilities  to  secure  capital  for  ex- 
tensions and  betterments! 

It  seems  to  me  we  do  not  need  much  argument  about 
that.  It  has  been  brought  out  what  we  all  know,  these 
utilities  have  about  reached  a limit  of  their  service.  The 
population  of  the  city  seems  to  be  increasing  about 
70,000  a year.  It  has  increased  70,000  a year  for  the  last 
two  or  three  years,  and  these  utilities  have  not  kept  up 
with  that.  They  are  behind.  I do  not  think  it  needs  any 
argument  to  say  that  the  comfort,  health  and  prosperity 
of  the  city  depend  entirely  on  keeping  these  things  up. 

Now,  as  I said,  nobody  wants  to  see  the  public  utilities 
make  enough  money  so  they  can  make  betterments  and 
extensions  out  of  earnings.  The  public  would  not  sub- 
mit to  it  and  ought  not  submit  to  it,  but  they  should  be 
able  to  make  money  enough  to  base  credit  on,  so  they  can 
borrow  money  or  sell  stock  to  make  betterments  and  ex- 
tensions, preferably  sell  stock. 

It  has  been  the  history  of  all  these  concerns,  I do  not 
need  to  say  that  to  you,  that  periodically  they  must  get 
in  new  capital.  That  is  true  of  every  public  utility  that 
is  good  for  anything.  They  never  seem  to  get  the  ter- 


52 


ritory  saturated,  and  I think  my  own  position  is  that 
ought  to  be  done  by  a stock  issue.  That  is  the  best  thing. 
The  next  best  thing,  of  course,  is  the  issue  of  bonds,  but 
in  either  case  there  must  be  something  on  which  to  base 
credit. 

I think  that  is  all,  Mr.  Chairman. 

Commissioner  Funk:  Mr.  Hulbert,  I am  a little  bit 
confused  in  my  own  mind  about  the  fact  it  is  constantly 
suggested  to  the  Commission  the  unfavorable  compari- 
son of  the  finances  of  utilities  as  compared  with  indus- 
trials. Is  there  any  marked  line  of  the  way  in  which  the 
financing  of  utilities  today  under  present  conditions  is 
done,  as  compared  ’with  industrials?  That  is  today,  is 
this  a fair  statement  of  the  situation?  The  utilities  are 
unable  to  sell  their  stocks  and  bonds  at  the  present  time 
as  you  suggested,  therefore  to  get  in  needed  new  capital 
they  have  to  resort  to  the  short  time  note  proposition. 
Now  is  that  the  situation  with  the  industrials? 

Mr.  Hulbert:  Yes,  sir. 

Commissioner  Funk:  Or  are  they  selling  their  stock 
which  gives  an  ownership  in  the  property  which  makes 
it  attractive  to  the  investor  in  that  he  may  participate 
in  the  profits,  promised  profits  that  are  set  forth?  IsnT 
it  true  quite  a considerable  part  of  the  industrial  financ- 
ing is  not  through  the  short  term  note  proposition  but 
placing  of  the  stock,  which  is  the  ownership  of  the  busi- 
ness, which  as  I say,  may  make  the  promised  profits,  that 
therefore  offers  unfavorable  comparisons  to  the  utilities? 
Is  that  a proper  view  to  offer  of  the  situation? 

Mr.  Hulbert : It  had  not  occurred  to  me  that  that  was 
so  before.  You  know,  of  course,  banks  do  not  come  in 
contact  with  stock  issues  very  much  unless  it  happens 
to  be  some  of  their  own  customers.  I am  rather  of  the 


53 


impression  there  has  been  a good  deal  of  difficulty  dis- 
posing of  stock  of  industrial  concerns  in  the  last  year. 
Of  course,  in  some  cases  where  the  stock  is  selling  above 
paf,  you  can  get  stockholders  to  take  new  stock  at  par 
because  they  see  some  speculation  in  it,  but  my  impres- 
sion is  that  most  of  the  industrial  financing  has  been 
done  the  other  way. 

Commissioner  Funk:  Short  term  notes! 

Mr.  Hulbert : I hope  you  are  right,  as  I would  rather 
see  it  in  the  form  of  stock  than  the  other  way.  I think 
we  are  going  to  have  a big  strain  on  these  things.  There 
is  not  such  a big  difference.  There  is  a difference  of  per- 
haps one  per  cent  in  the  rates  on  these  short  term  indus- 
trials and  first  class  utilities.  I think  it  is  perfectly  nat- 
ural that  an  investor  discriminates  at  this  time  a little 
against  the  utilities.  He  feels  that  everything  is  going 
up  that  the  utility  works  with  and  that  they  have  not  the 
same  control  over  price  of  the  product  as  the  industrial 
has.  I think  that  is  all. 

There  is  a little  hesitation  about  it,  and  we  know  there 
are  a lot  of  utilities  whose  credit  has  been  entirely  de- 
stroyed by  the  situation  they  are  in,  and  that  reflects 
somewhat  on  the  better  class. 

Commissioner  Lucey : What  is  the  outlook  for  money 
in  the  next  year  or  two,  what  is  your  opinion! 

Mr.  Hulbert : Of  course  a year  or  two  is  a long  time 
for  us  to  look  ahead,  but  I will  say  frankly  there  is  a 
good  deal  of  feeling  of  anxiety  among  bankers  as  to  the 
outlook  for  next  year,  a good  deal  of  anxiety.  The  de- 
mands of  business  are  extraordinary.  It  requires  a great 
deal  more  money,  as  you  know,  to  do  the  same  amount  of 
business  now  than  before,  and  there  is  not  much  chance 
of  that  changing  that  T can  see,  and  as  I said  before  we 


54 


feel  that  there  are  certain  things  in  the  way  of  financing 
not  only  industrials  but  utilities,  that  must  be  done,  and 
those  things  will  be  taken  care  of  if  the  proper  credit 
basis  can  be  had  for  that,  but  at  a higher  rate  of  interest. 
There  is  no  question  about  that.  The  interest  rate  is 
going  to  be  high. 

Commissioner  Shaw:  Mr.  Hulbert,  will  the  Federal 
Reserve  Banks  re-discount  any  public  utility  paper  or 
bonds  or  notes? 

Mr.  Hulbert:  No,  sir,  no,  sir,  they  absolutely  are  pro- 
hibited by  law  from  doing  so. 

Commissioner  Shaw : Are  they  prevented  by  law  from 
doing  so? 

Mr.  Hulbert:  Yes,  sir.  That  is  the  law  provides  spe- 
cifically what  they  may  discount.  Public  utilities,  any 
note  whatever  secured  by  collateral,  either  bonds  of  pub- 
lic utilities,  or  railroads,  or  what  not,  are  not  eligible. 

Commissioner  Shaw:  Assume  that  the  law  was 
amended,  would  that  improve  the  condition  any  as  to 
better  classes  of  public  utilities,  and  assume  the  compa- 
nies would  lay  down  their  own  specifications  as  to  re- 
quirements? 

Mr.  Hulbert:  I would  say  it  would  be  an  exceedingly 
unsound  and  dangerous  thing  for  the  Government  to  do. 
What  would  happen  if  such  a thing  were  done,  would  be 
for  a short  time  you  would  find  the  pressure  eased  and 
prices  and  the  securities  would  go  up,  but  it  is  a good 
deal  like  feeling  good  when  you  are  getting  drunk.  You 
are  going  to  have  a headache  afterwards.  There  is  going 
to  be  a reaction  from  that  sort  of  thing.  The  vital,  fun- 
damental principle  of  the  Federal  Bank  is  they  discount 
nothing  which  is  not  liquid,  nothing  they  cannot  collect 
on,  and  the  law  is  founded  on  the  principle  that  no  long 


55 


time  note  of  any  form  shall  be  allowed  in  the  bank,  and 
they  should  not.  If  we  ever  depart  from  that  principle 
we  are  lost. 

There  is  one  thing  now  that  is  a real  danger,  and  that 
is  that  the  Federal  Reserve  Banks  are  filled  up  with 
government  securities.  It  is  the  most  non-liquid  they  can 
have.  They  cannot  realize  on  them.  They  cannot  do 
anything  with  them,  and  that  is  probably  responsible  for 
sixty  per  cent  of  the  trouble  that  we  are  in  here  now,  but 
that  was  a war  measure.  We  cannot  help  it.  It  had  to 
be  done,  but  it  is  a fact  we  must  not  forget,  these  Federal 
Reserve  banks  are  clogged  up  today  with  a lot  of  stuff 
they  cannot  realize  on.  If  you  undertake  to  put  on  a lot 
of  public  utility  bonds — 

Commissioner  Shaw : I had  more  in  mind  short  term 
notes  being  issued,  one  or  two  years. 

Mr.  Hulbert:  The  Federal  Reserve  act  limits  eligible 
paper  in  the  commercial  line  to  three  months.  That 
means  paper  that  is  liquid,  in  three  months  time  that 
paper  will  be  paid.  That  is  the  only  real  safeguard  they 
had.  I am  afraid  they  have  not  adhered  to  that  strictly. 

Commissioner  Lucey:  Do  you  think  it  would  be  good 
financing  or  proper  way  to  handle  the  situation  as  it  ex- 
ists in  order  to  relieve  possibly  the  strain  which  exists 
now  and  may  be  coming  for  the  next  two  years  if  this 
mass  of  government  bonds  should  be  re-financed  by  an 
issue  of  long  term  bonds  extending  over  seventy-five  or 
one  hundred  years  and  let  posterity,  that  has  never  done 
much  for  us,  take  care  of  some  of  it. 

Mr.  Hulbert : I would  like  very  much  to  see  that  done. 
I think  we  are  carrying  more  than  our  share  of  the  load 
just  now. 

Commissioner  Lucey:  Wouldn’t  that  ease  up  this  sit- 
uation? 


56 


Mr.  Hulbert:  It  would  decidedly.  It  would  ease  up 
the  whole  situation  if  some  way  could  be  found.  I do 
not  know  that  I quite  got  the  amount.  You  said  seventy- 
five  or  one  hundred  million. 

Commissioner  Lucey:  No,  I say  to  take  this  indebted- 
ness that  exists  and  extend  it  over  a period  of  years, 
whatever  it  may  be,  say  seventy-five  or  one  hundred 
years. 

Mr.  Hulbert:  Yes. 

Commissioner  Lucey:  Liquidate  it  as  those  years 
came  along. 

Mr.  Hulbert : That  would  be  very  great  relief,  yes,  sir, 
very  great  relief. 

Commissioner  Lucey:  Another  question  before  you 
leave.  Do  you  find,  Mr.  Hulbert,  that  there  is  any  real 
prejudice  in  the  mind  of  the  investor  against  the  public 
utility  as  such. 

Mr.  Hulbert:  Why,  I think,  Mr.  Commissioner,  that 
there  is  a feeling  in  the  minds  of  the  public,  that  is  I am 
expressing  my  own  feeling  now,  that  a majority  of  the 
public  utilities  in  the  country  are  having  difficulty  in 
making  both  ends  meet,  and  there  is  in  my  mind  a preju- 
dice against  those  securities.  I presume  the  public  gen- 
erally feels  that  way.  There  is  a feeling  they  are  sub- 
ject more  or  less  to  political  attack  and  regulations  that 
are  hurtful.  Whether  it  is  true  or  not,  that  impression 
exists,  that  they  have  difficulty  in  adjusting  their  reve- 
nue to  any  increased  expenditure  unexpected.  I do  not 
think  we  can  get  away  from  that.  I think  there  will  be 
always  that  prejudice. 

Commissioner  Lucey:  As  a matter  of  fact  the  fact 
that  the  utility  is  regulated  instead  of  creating  any  preju- 
ice against  it  should  be  a manner  and  means  of  convinc- 


57 


ing  the  investing  public  that  the  securities  which  are 
passed  and  approved  by  the  Commission  are  good  and 
should  be  taken  on  the  market? 

Mr.  Hulbert:  Well,  I want  to  say  that  I am  very 
strongly  in  favor  of  the  system  of  giving  public  utilities 
a monopoly  under  such  regulations  as  we  have  here,  but 
I am  trying  to  state  what  I believe  to  be  the  facts  in  re- 
gard to  the  feeling  of  the  public.  I think  there  is  a lit- 
tle feeling  perhaps  that  is  justified,  in  readjustment, 
while  the  approval  of  the  Commission  at  the  time  the 
securities  get  out,  is  very  important  and  very  helpful; 
we  all  realized  that  as  bankers  and  always  advertised  it, 
as  you  have  probably  noted,  but  I think  it  is  perhaps  nat- 
ural that  we  all  feel  that  any  change  in  conditions  is 
adjusted  more  slowly  among  industries.  I think  that  is 
necessarily  so.  We  cannot  help  that. 

Commissioner  Lucey:  The  chances  are,  or  rather  in- 
stead of  making  the  statement  I rather  ask  it  as  a ques- 
tion, if  in  your  judgment  because  of  this  misunderstand- 
ing on  the  part  of  the  public  as  to  the  purpose,  the  real 
purpose  and  manner  and  method  and  object  of  public  reg- 
ulation. 

Mr.  Hulbert:  I think  they  should  have  better  infor- 
mation and  of  course  the  public  and  the  bankers  are  con- 
fused by  disputes  of  jurisdiction  as  to  whether  the  city 
has  control  of  certain  regulations  or  whether  this  Com- 
mission has.  We  hear  all  these  differences,  and  natur- 
ally that  is  a little  disturbing. 

Commissioner  Lucey : I do  not  think  there  is  any  seri- 
ous dispute  now  on  that  subject. 

Mr.  Hulbert : I hope  not. 

Mr.  Cleveland : The  question  of  the  control  of  the  city 
is  real.  I have  been  told  to  keep  still  but  these  gentle- 


58 


men  seem  to  think  it  is  funny.  The  fact  is  that  the  ques- 
tion of  jurisdictions  that  are  here  in  legislative  and  judi- 
cial ways  will  have  to  be  taken  into  consideration.  Laugh- 
ing don’t  change  it. 

Mr.  Hulbert:  That  is  part  of  the  atmosphere  of  the 
thing  and  we  cannot  help  that,  of  course. 

Mr.  Cleveland:  Yes,  1 tried  to. refrain  from  making 
any  remarks,  but  if  you  want  them  I will  give  them  to 
you. 

Chairman  Wilkerson : We  will  adjourn  till  two  o’clock 
now. 

Whereupon  an  adjournment  was  taken  until  two 
o’clock  p.  m.,  April  29,  1920. 

Chicago,  111.,  April  29,  1920,  2 p.  m. 

Parties  met  pursuant  to  adjournment. 

Present:  Same  as  before. 

Chairman  Wilkerson:  You  may  proceed  now. 

Harold  L.  Stuart,  a witness  herein,  having  been  first 

duly  sworn,  testified  as  follows : 

Mr.  Bangs : Will  you  tell  the  reporter  your  name,  and 
present  position,  and  what  your  experience  has  been  in 
banking! 

A.  Harold  L.  Stuart,  president  of  Halsey,  Stuart  & 
Company,  investment  bankers:  I have  been  in  the  invest- 
ment business  for  twenty- five  years. 

Q.  Will  you  just  make  a statement  in  answer  to  the 
interrogatories  that  you  have  previously  read! 

A.  I think  that  this  first  question  divides  itself  into 
two  or  more  parts.  In  regard  to  the  situation  with  ref- 


59 


erence  to  the  demand  for  capital  by  industrial  concerns, 
I will  say  that  the  demand  has  been  enormous.  In  the 
whole  financial  history  of  the  country  there  has  never 
been  such  a demand  on  the  part  of  industries  for  capital 
as  there  has  been  since  the  armistice,  and  due  to  the  prof- 
its which  industries  have  made  on  account  of  the  war 
they  have  been  able  and  willing  to  pay  the  price  neces- 
sary to  raise  the  money  which  they  required.  The  de- 
mand for  capital  on  the  part  of  the  public  utilities  has 
also  been  great,  but  that  demand  has  only  been  satisfied 
to  a moderate  extent,  a fraction  of  the  amount  of  money 
asked  for  due  to  the  fact  that  the  investing  public  have 
preferred  to  buy  industrial  securities,  rather  than  public 
utility  securities. 

The  investment  banker  or  anyone  dealing  in  securities 
has  no  control  over  the  investment  market,  nor  has  he 
any  control  over  the  kind  of  securities  which  an  investor 
will  buy.  A man  who  has  been  an  investor  in  public  utili- 
ties already  has  his  money  in,  and  unless  he  is  satisfied 
to  put  additional  money  in  there  is  not  any  power  that 
can  make  him  put  it  in  unless  he  feels  that  it  is  safe,  so 
the  investment  banker  is  really  the  go-between  in  raising 
the  money,  and  he  supplies  naturally  what  the  investing 
public  and  what  his  customers  will  take. 

Chairman  Wilkerson : I suppose  his  advice  has  some- 
thing to  do  with  it.  It  is  like  a lawyer  stands  with  his 
client. 

Mr.  Stuart:  I think  that  was  so  at  one  time,  but  I 
think  since  this  country  has  grown  to  be  so  much  of  an 
investing  country,  that  the  great  majority  of  investors — 
of  course  it  is  always  so  of  institutions  who  buy,  banks 
who  buy  and  insurance  companies  who  buy,  and  it  has 
now  gotten  so  even  the  small  investor  who  is  an  experi- 


60 


enced  lender  of  money,  he  has  his  own  ideas  about  these 
things,  and  I think  that  the  chief  value  of  an  investment 
banker’s  recommendation  now  in  the  eyes  of  the  investor 
is  that  the  property  is  there,  and  that  the  securities  have 
been  legitimately  issued — but  there  is  no  such  thing  as  an 
investor  now  following  an  investment  banker  in  blind 
faith. 

The  present  interest  rate  for  industrial  securities 
which  have  dominated  the  market  for  so  far  as  corporate 
financing  is  concerned,  as  I have  said,  since  the  armis- 
tice has  ranged  anywhere  from  say  six  and  three-quar- 
ters per  cent  a year  ago,  up  to  eight  per  cent  and  even 
higher  now,  and  that  is  the  income  that  has  been  offered 
to  the  ultimate  investor. 

Now,  below  that,  of  course,  have  to  come  the  expenses 
of  issue,  bankers’  commissions,  and  so  forth. 

Commissioner  Funk:  You  are  speaking  of  stock,  I 
take  it,  industrial  stocks? 

Mr.  Stuart:  No,  sir,  industrial  bonds  and  notes.  All 
my  remarks  are  confined  to  credits  and  not  to  evidences 
of  ownership. 

Commissioner  Funk : Bonds  and  notes. 

Mr.  Stuart : Credits,  yes,  sir,  bonds  and  notes.  Most 
of  this  industrial  financing  has  taken  the  character  of 
short  term  indebtedness,  and  I think  in  most  cases  that 
the  industries  expect  to  pay  not  only  the  interest  on  these 
short  term  loans  but  the  principal  as  well,  out  of  earn- 
ings. I am  quite  sure  that  is  so  in  the  majority  of  cases. 

Commissioner  Lucey:  That  could  not  be  so  naturally 
for  large  sums  of  money.  Aren’t  some  of  these  short 
term  notes  used  simply  to  carry  the  corporation  over  this 
present  period  so  it  may  be  permanently  financed  on  a 
sounder  basis  later  on. 


61 


Mr.  Stuart:  That  is  so  in  some  cases  but  in  the  ma- 
jority of  cases  the  earnings  are  large  enough  so  that  the 
interest  and  serial  payments — they  are  usually  made  to 
mature  in  series — can  be  paid  out  of  earnings.  The  rate 
of  interest  on  public  utilities  securities  has  steadily  de- 
clined and  it  is  only  the  better  known  and  larger  utilities 
that  have  been  able  to  borrow  any  money  at  all  to 
speak  of. 

Mr.  Cleveland:  I do  not  think  Mr.  Stuart  meant  to 
say  what  he  said:  You  say  the  rate  of  interest  on  public 
utilities  securities  have  steadily  declined. 

Mr.  Stuart : The  yield  to  the  investor. 

Commissioner  Funk:  When  you  speak  of  the  utility 
obligation  are  you  speaking  of  the  same  character  you 
just  spoke  of  as  to  the  industrial? 

Mr.  Stuart:  No,  sir,  I intended  to  distinguish  between 
the  two. 

Commissioner  Funk.  Well,  I would  like  to  hear  that. 

Mr.  Stuart : I have  intimated  that  the  investing  pub- 
lic do  not  seek  public  utility  investments  at  all  and  sub- 
stantially speaking  any  public  utility  securities  that  are 
sold  are  only  sold  with  difficulty.  I think  that  finishes 
the  first  question. 

The  second  question  will  the  general  business  situation 
in  the  City  of  Chicago  be  affected  by  the  financial  stand- 
ing of  the  public  utilities  and  their  ability  to  secure  capi- 
tal for  extensions  and  betterments. 

In  my  opinion  it  would  be  seriously  affected,  not  only 
as  to  Chicago  but  as  to  any  community,  because  I believe 
that  the  public  utilities  have  demonstrated  that  they  are  a 
necessity,  a great  convenience  to  the  public,  and  I think 
other  things  being  equal  the  population  will  flow  where 


62 


they  can  get  the  conveniences  of  life,  conveniences  and 
necessities. 

Commissioner  Wilkerson : Can  I draw  your  attention 
again  to  the  third  subdivision  of  that  first  question? 

Mr.  Stuart : Do  you  mean  about  what  rate  it  is  neces- 
sary to  earn? 

Chairm.an  Wilkerson : Yes. 

Mr.  Stuart:  My  reply  to  that  would  be  that  a utility 
in  order  to  command  capital  would  have  to  be  permitted 
to  earn  enough  money  to  take  care  of  all  of  its  operating 
expenses,  including  maintenance,  depreciation  and  enough 
margin  over  its  interest  and  dividend  requirements  to  at- 
tract additional  capital,  and  I think  that  the  question  of 
interest  rates  in  order  to  attract  capital  is  just  one  side 
of  the  question. 

I think  that  an  investor  in  the  future  in  public  utility 
securities  has  got  to  feel  that  his  investment  will  be  fairly 
treated  and  that  the  property  to  which  he  loans  money 
will  not  have  to  be  in  the  position  of  fighting  for  its  life 
all  the  time. 

As  I said  before  the  man  who  already  has  his  money 
in  you  can  control,  but  there  is  not  anybody  who  has 
or  can  control  the  investor  of  today  who  has  not  yet  put 
his  money  in,  or  who  has  not,  due  to  conditions  that  he  is 
not  satisfied  with  refuses  to  put  any  more  money  in. 

Chairman  Wilkerson : To  speak  concretely,  this  is  one 
branch  of  a question  which  arises  in  every  case  before 
the  Commission. 

It  is  the  duty  of  the  Commission  in  a rate  making  pro- 
ceeding to  determine  the  fair  value  of  the  property,  to 
take  into  consideration  the  elements  which  the  courts 
have  said  we  are  required  to  consider. 


Mr.  Stuart  : Exactly. 

Chairman  Wilkerson:  Then,  in  addition  to  that,  wo 
must  determine  what  is  a fair  rate  of  return  on  the  fair 
value  as  fixed. 

Now  that  third  subdivision  of  that  question  I think  is 
directed  to  that,  and  if  you  have  any  opinion  measured 
in  rate  of  per  cent  I Avould  be  glad  to  have  you  answer 
that  question. 

Mr.  Stuart : It  seems  to  be  that  the  fair  rate  of  return 
would  be  a return  on  the  value  of  the  money  at  the  time 
it  went  in.  For  instance,  supposing  today  that  money 
costs  one  of  the  large  utilities  eight  per  cent — as  a 
matter  of  fact  they  could  not  get  it  for  eight  per  cent, 
I do  not  think — why  is  not  the  rate  that  money  is  worth 
at  the  time  it  is  invested  the  criterion? 

Commissioner  Lucey:  Do  you  mean  the  money  that 
went  in  at  four  and  a half  should  be  paid  four  and  a 
half? 

Mr.  Stuart:  For  all  time.  Money  that  goes  in  today 
at  eight  costs  eight  for  all  time,  the  money  that  goes  in 
at  six  costs  six  all  the  time  and  the  average  would  be  all 
right.  That  would  be  determined  at  the  time  the  rates 
were  made. 

Commissioner  Wilkerson:  You  think  a rate  of  return 
based  on  an  application  of  that  principle  would  restore 
the  impaired  credit. 

Mr.  Stuart:  I do.  The  rate  I speak  of  would  be  the 
minimum  and  that  would  be  a guaranteed  rate. 

In  order  to  attract  capital  you  would  have  to  have 
some  kind  of  margin  above  that  or  you  would  not  be 
able  to  get  additional  capital.  An  investor  puts  money 
in  securities,  he  does  not  want  to  see  the  seven  per  cent 


64 


covered,  but  wants  to  see  nine  or  ten  per  cent.  He  wants 
to  see  a big  margin  above  his  interest  charges.  I do  not 
believe  that  there  is  a public  utility  in  the  United  States 
today,  the  market  value  of  whose  security  is  equal  to 
the  cost  of  the  property,  not  the  reproduction  value  of 
today’s  prices,  but  the  cost  of  the  property. 

Commissioner  Lucey : I would  not  agree  with  you  al- 
together on  that. 

Mr.  Stuart:  I would  like  to  know  what  it  is,  if  there 
is  one. 

Mr.  Ringer : The  Chicago  Telephone  Company. 

Mr.  Stuart : Now,  what  is  the  market  value  of  the  Chi- 
cago Telephone  Company’s  bonds  and  stocks'? 

Mr.  Ringer  : Their  testimony  is  here  today  the  bonds 
were  selling  at  ninety ; no  testimony  as  to  the  stock.  That 
is  forty  million  dollars  selling  at  par,  that  is  the  amount 
of  the  stock,  and  bonds  at  ninety.  The  statement  was 
made  by  someone  here  today  that  the  fair  value  today 
was  about  seventy-two  million  dollars. 

Mr.  Sunny : Eighty-six. 

Mr.  Ringer:  The  statement  was  made  in  the  record, 
Mr.  Insull  said  the  present  value  of  the  property  was 
above  seventy-two  million. 

Mr.  Sunny:  That  is  the  City  of  Chicago  alone. 

Chairman  Wilkerson:  You  agree  eighty-six  is  above 
seventy-two? 

Mr.  Ringer:  Yes,  I agree  to  that.  The  total  outstand- 
ing bonds  and  stocks  are  considerably  below  that  at  the 
market. 

Mr.  Stuart:  That  is  what  I said.  I said  I do  not  be- 
lieve that  there  is  a public  utility  in  the  United  States 


65 


the  market  value  of  whose  security  is  equal  to  the  cost 
of  the  property.  That  is  what  I said.  • 

Mr.  Ringer : The  cost  of  that — you  get  the  cost  right 
there,  and  you  will  find  our  statement  is  correct  and  yours 
is  somewhat  in  doubt. 

Mr.  Stuart:  There  is  about  fifty-eight  million.  The 
cost  of  the  property  is  eighty-six.  That  is  what  I meant 
to  say. 

Mr.  Ringer:  What  are  the  figures  you  had*? 

Mr.  Stuart:  The  market  .value  of  the  securities  is 
fifty-eight  and  the  cost  of  the  property  eighty-six. 

Mr.  Ringer  : Cost  of  the  property  is  eighty-six. 

Mr.  Stuart:  Yes,  sir. 

Commissioner  Lucey : I understood  your  statement,  at 
least  I took  exception  to  it,  you  did  not  limit  it  to  utilities 
in  Chicago  you  said  in  the  United  States. 

Mr.  Stuart:  Oh,  yes,  sir,  I made  that  broad.  You 
mean  about  the  market  value  of  the  securities? 

Commissioner  Lucey:  Yes. 

Mr.  Stuart:  Yes,  I made  that  broad,  general  state- 
ment. 

Commissioner  Lucey:  You  said  there  was  no  utility 
in  the  United  States — you  did  not  mean  there  was  a 
utility  in  the  United  States  whose  cost  was  equal,  I under- 
stood you  to  say,  to  the  value  of  its  securities,  now  you 
say  the  market  value. 

Mr.  Stuart:  Wliat  I intended  to  say  was  this.  That 
I do  not  believe  there  is  a utility  in  the  United  States 
the  market  value  of  whose  securities  was  as  high  as  the 
actual  cost  of  the  property;  not  replacement  value  on 
today’s  high  prices. 


/ 


66 

Chairman  Wilkerson:  Are  you  familiar  with  the  con- 
ditions of  those  companies  in  New  York,  the  Interhorough 
Rapid  Transit? 

Mr.  Stuart:  Yes. 

Chairman  Wilkerson:  Assuming  the  correctness  of 
the  statement,  how  do  you  explain  the  present  chaotic 
conditions  of  those  companies  in  New  York,  assuming 
they  have  property  so  much  in  excess  of  the  market  value 
of  their  securities? 

Mr.  Stuart : For  instance,  take  the  Interborough  Rapid 
Transit. 

Chairman  Wilkerson : In  the  hands  of  a receiver,  and 
been  all  split  up  and  paying  half  a dozen  different  fares 
around  the  different  parts  of  the  city.  To  what  do  you 
attribute  that? 

Mr.  Stuart:  I do  not  think  I understand  the  question 
but  in  relation  to  the  market  value,  take  the  Interborough 
Rapid  Transit  Company  bonds  that  were  originally  sold 
at  something  above  ninety,  now  selling  around  fifty.  As- 
suming there  was  nothing  else  that  went  into  the  prop- 
erty but  the  bonds,  the  fact  is  that  the  property  must 
have  cost  something  above  ninety,  and  on  the  bonds  the 
market  value  is  fifty  and  they  are  still  paying  interest. 

Commissioner  Lucey:  You  said  a while  ago  that  you 
thought  the  rate  of  return  should  be  at  least  the  same 
rate  of  return  that  money  was  worth  when  it  was  put 
into  the  property.  Did  I so  understand  you? 

Mr.  Stuart:  Yes,  then  I amplified  that  by  saying  that 
should  be  the  lowest  guaranteed  return  for  all  time,  but 
there  would  have  to  be  a margin  above  that  in  order  to 
attract  capital. 

Commissioner  Lucey:  That  margin  above  that  would 


67 


not  be  for  purposes  of  dividend!  That  would  be  as  a 
sort  of  guarantee  fund  that  the  company  was  able  to 
keep  itself  rehabilitated,  in  other  words,  liberal  depre- 
ciation account. 

Mr.  Stuart:  I see  your  point.  I was  speaking  from 
the  point  of  vieAV  of  credit,  not  as  a stock  ownership,  but 
I was  thinking  of  a dealer  in  bonds,  the  kind  of  a state- 
ment that  a property  would  have  to  make  in  order  to 
attract  capital.  That  would  be  so  far  as  credits  are 
concerned.  Now  then,  I presume  a buyer  of  stock,  a 
buyer  of  equity  in  a property — 

Commissioner  Lucey:  What  do  you  mean  by  credits, 
bonds! 

Mr.  Stuart : Bonds  and  notes,  promises  to  pay. 

Commissioner  Lucey : Do  you  think  that  the  bonds  and 
notes  should  be  satisfied  with  the  same  rate  of  return 
that  money  was  worth  at  the  time  the  institutions  were 
built! 

Mr.  Stuart:  Supposing  we  will  say  there  was  a dif- 
ferent series  of  money  went  into  a property,  one  at  five — 

Commissioner  Lucey:  Let  us  go  on  the  theory  the 
property  was  built  twenty-five  years  ago,  or  twenty 
years  ago  when  money  was  worth,  sa^q  five  per  cent. 

Mr.  Stuart : But  it  would  be  impossible  for  a property 
built  twenty-five  years  ago  to  remain  stationary.  It  would 
have  either  been  out  of  business  or  been  a borrower  many, 
many  times  since  that  time,  and  the  average  rate  over 
the  last  twenty-five  years,  might  have  been,  let  us  say, 
five  and  a half  per  cent.  That  would  be  from  the  stand- 
point of  the  buyer  of  the  securities. 

Commissioner  Lucey:  Do  you  know  of  any  securities 
today,  either  public  utilities  or  industries,  credits,  as  you 


68 


call  them,  that  you  can  put  on  the  market  at  anv  such 
rate? 

Mr.  Stuart:  No,  sir,  you  could  not  today,  hut  I said 
that  I thought  for  instance  today  if  a buyer  of  credit 
would  want  to  see,  assuming  that  he  bought  the  credit 
or  the  bond  or  note  on  a seven  per  cent  basis,  he  would 
want  to  see  nine  or  ten  per  cent  there  of  earnings  on 
the  property.  He  would  want  some  margin  above  his 
seven  per  cent. 

Commissioner  Lucey:  Of  a public  utility  that  is  a 
monopoly,  with  the  depreciation  being  taken  care  of  and 
sufficient  money  to  pay  operating  expenses  assured,  de- 
preciation fund  assured,  why  is  there  any  necessity  of  a 
difference  of  four  or  five  per  cent  margin  that  cannot 
be  used  for  any  purpose  by  the  utility? 

Mr.  Stuart:  I think  that  perhaps  I did  not  make 
myself  clear.  The  rate  of  interest  that  I spoke  of  was 
from  the  point  of  view  of  the  senior  money  that  goes  in, 
the  money  on  the  mortgages  and  bonds  and  notes,  which 
would  have  to  be  on  a basis  not  only  to  meet  current  mar- 
ket rates  of  interest,  but  so  safeguarded  that  an  investor, 
a new  investor  coming  into  the  market  buying  those  se- 
curities would  be  satisfied  that  his  investment  in  the  fu- 
ture would  be  protected. 

Commissioner  Lucey:  All  right.  Now,  at  the  present 
time  with  securities  being  issued  and  following  more  the 
decisions  of  the  courts,  we  will  say  the  rate  of  return 
ought  to  be  somewhat  roughly  equal  to  the  value  of  money 
in  that  community,  which  Commissions  have  guaranteed, 
what  is  the  reason  today  that  utilities  whose  credit 
seems  to  be  good,  whose  rate  of  return  has  been  fair 
in  the  past  and  are  not  over  capitalized,  that  in  the  ordi- 
nary course  of  events  their  credit  would  be  worth  better 


69 


than  par  in  the  market  in  normal  conditions,  what  is  the 
reason  today  that  in  competition  with  the  industrials, 
though  they  sell  to  net  the  investor  about  the  same  rate 
of  return,  why  is  the  industrial  preferred  to  that  particu- 
lar utility? 

Take  the  one  you  were  talking  about  as  an  illustra- 
tion, the  Chicago  Telephone  Company  comes  within  that 
classification. 

Mr.  Stuart : I think  there  is  a general  indisposition  on 
the  part  of  the  investing  public  to  purchase  public  utility 
securities.  I think  the  general  investing  public  would 
confound  all  classes  of  public  utilities,  and  I should  say 
that  the  present  state  of  mind  of  the  investing  public  is 
that  they  would  rather  buy  almost  any  sort  of  invest- 
ment than  public  utility  securities.  It  is  not  at  all  in- 
frequent for  an  investment  banker  to  have  the  experience 
with  some  investor  that  he  may  have  known  and  done  busi- 
ness with  for  years,  to  tell  him  or  send  word  to  him  that 
he  does  not  want  to  invest  any  longer  in  public  utilities. 

Commissioner  Wilkerson:  Now,  as  a result  of  your 
experience  to  what  is  that  to  be  attributed? 

Mr.  Stuart:  I would  say  that  they  feel  that  the  pub- 
lic utilities  have  not  been  allowed  to  earn  enough  money 
on  their  investment  to  make  it  absolutely  safe,  and  in 
cases  where  relief  has  been  necessary  and  granted,  and 
the  relief  has  been  so  slow  in  coming  that  the  investment 
has  been  jeopardized. 

Commissioner  Lucey:  I want  to  ask  you,  Mr.  Stuart, 
to  state  flatly  or  definitely  as  you  can,  what  is  the  value 
of  the  public  utilities  credits,  so-called,  that  are  in  the 
hands  of  the  public  in  this  country? 

Mr.  Stuart:  Do  you  mean  the  securities  that  are  out- 
standing today? 


70 


Commissioner  Lucey : Yes. 

Mr.  Stuart:  I prepared  a brief  list  here  of  some  of 
the  better  known  companies. 

Commissioner  Lucey:  I mean  in  a general  way,  I do 
not  want  you  to  itemize  this  company  or  that.  How 
much  is  outstanding?  Exclude  the  railroads  from  that 
consideration,  if  you  can. 

Mr.  Stuart : The  basis  of  securities  of  the  public  util- 
ities now  outstanding? 

Commissioner  Lucey:  Not  the  basis  of  them,  but  the 
amount.  Is  it  a billion,  two  billion,  or  three  billion  or 
what  is  outstanding? 

Mr.  Stuart:  I cannot  answer  that. 

Commissioner  Lucey:  Have  you  any  idea? 

Mr.  Stuart:  No,  sir,  that  would  be  at  the  moment  for 
me  a wild  guess. 

Commissioner  Lucey : There  are  statistics  on  that  sub- 
ject? 

Mr.  Stuart:  They  could  be  made  up,  yes,  sir. 

Commissioner  Lucey:  And  who  or  what  institutions 
as  a class  have  been  the  investors  in  this  class  of  se- 
curities ? 

Mr.  Stuart : The  great  majority  of  them  undoubtedly 
are  held  in  my  opinion  by  private  investors  and  estates. 

Commissioner  Lucey:  To  what  extent  are  the  insur- 
ance companies  investors  in  utility  securities,  do  you, 
know? 

Mr.  Stuart : At  the  present  time  except  in  rare  cases, 
they  are  not  investors  at  all  in  public  utility  securities. 
They  have  been  in  times  past  as  have  been  some  of  the 
savings  banks. 


71 


Commissioner  Lucey:  Do  you  know  to  what  extent 
those  institutions  are  holders  of  investments  as  hereto- 
fore made? 

Mr.  Stuart : No,  sir.  A large  amount  in  the  aggregate, 
undoubtedly. 

Commissioner  Shaw:  Mr.  Stuart,  in  times  past  the 
Commission  has  been  advised  that  an  operating  utility 
in  which  the  net  earned  was  twice  the  interest  charges, 
was  considered  by  the  investing  public  and  bankers  as 
being  A-1  securities.  Does  that  rule  hold  good  at  this 
time  ? 

Mr.  Stuart:  It  should;  now  it  would  be  even  more 
true  than  it  has  been  in  times  past. 

Commissioner  Shaw:  That  being  true,  would  not  then 
the  relations  between  the  outstanding  bonds  and  notes 
and  the  stock  that  might  represent  the  value  of  the 
property,  have  some  bearing  upon  the  company’s  credit? 

Mr.  Stuart:  It  has  a great  bearing,  and  I think  that 
one  of  the  great  weaknesses  in  the  public  utility  financial 
structure  has  been  that  they  have  not  been  permitted  to 
earn  enough  in  the  past  to  put  out  what  you  call  junior 
securities,  that  is  preferred  and  common  stocks,  and  sell 
them  for  cash. 

Commissioner  Funk:  It  is  frequently  stated  to  the 
Commission  that  utilities  have  difficulty  in  competing  in 
the  market  for  money  with  industrial  concerns.  Have 
you  observed  that  there  is  any  difference  in  the  kind  of 
obligations  that  are  offered,  taking  the  utilities  as  one 
class  and  industrials  as  another.  I mean  does  it  happen  at 
the  present  time  that  the  utilities  are  offering  short  term 
notes,  whereas  the  situation  might  be  described  that  the 
industrials  are  offering  stock  or  bonds? 


72 


Would  that  make  any  difference  in  the  difficulties  that 
the  utilities  are  confronted  with  in  securing  the  money? 

It  has  been  stated  that  the  utilities  cannot  sell  their 
stocks  and  bonds,  that  the  money  they  raise  today  has 
to  be  by  short  term  notes. 

Mr.  Stuart:  Yes. 

Commisisoner  Funk : I thought  possibly  the  situation 
was  that  large  industrial  concerns  are  not  raising  their 
money  by  short  term  notes  but  by  selling  stocks  and  per- 
haps to  some  extent  bonds.  Would  that  be  a fair  state- 
ment of  the  situation? 

Mr.  Stuart:  There  have  been  a great  many  hundred 
million  dollars  worth  of  industrial  short  term  notes,  and 
short  term  bonds  put  out. 

Commissioner  Funk:  Don’t  they  quite  frequently  carry 
rights  as  to  conversion? 

Mr.  Stuart : Yes,  into  stock  of  the  company,  conversion 
into  stock  of  the  company. 

Commissioner  Funk : So  that  would  make  those  issues 
more  attractive  than  utility  obligations  which  are  offered? 

Mr.  Stuart:  Yes,  sir,  even  if  the  utilities  were  offered 
at  a higher  rate. 

Commissioner  Funk : That  is  all. 

(Witness  excused.) 


Charles  Gr.  Dawes,  a witness  herein,  having  been  first 
duly  sworn,  testified  as  follows : 

Mr.  Bangs : Will  you  qualify  yourself  by  giving  your 
name  and  experience. 

Mr.  Dawes:  Charles  C.  Dawes. 


73 


Mr.  Bangs  : State  your  present  business. 

Mr.  Dawes:  I am  a banker  at  present,  president  of 
the  Central  Trust  Company  of  Illinois,  and  I have  been 
interested  in  public  utilities  business  in  one  way  or  an- 
other for  the  last  twenty-five  years.  That  is  not  saying 
I am  qualified  to  be  a witness.  The  longer  I stay  in 
it,  the  less  I think  I know  about  it. 

Chairman  Wilkerson:  You  are  perhaps  as  well  quali- 
fied as  most  of  us.  General. 

Mr.  Dawes : If  there  is  anything  that  I can  be  of  use 
to  the  Commission  in,  I believe  it  would  be  better  if  I 
would  just  go  my  own  way  rather  than  be  questioned, 
because  there  are  some  things  which  occur  to  me  in 
connection  with  this  situation. 

Commissioner  Wilkerson:  You  may  proceed. 

Mr.  Dawes : And  while  my  interests  are  not  here  in 
Chicago,  they  are  scattered  pretty  well  over  the  United 
States,  and  we  have  had  situations  similar  to  this,  and 
have  dealt  with  quite  a number  of  the  Commissions. 

Now,  on  listening  to  Mr.  Stuart’s  testimony  here,  I 
am  impressed,  and  I think  the  Com^mission  is  impressed, 
with  the  difficulty  of  formulating  set  rules  they 
are  going  to  apply  usefully  to  any  conditions  in  a 
particular  locality.  That  is  especially  so  in  reference 
to  what  General  Lucey  spoke  of,  as  to  a rate  of  return  on 
public  utilities  that  is  going  to  attract  capital.  It  seems  to 
me  that  it  is  impossible  to  say  and  depends  upon  so  many 
circumstances,  but  there  is  one  circumstance  which  affects 
the  flow  of  capital  to  any  enterprise  and  that  is  the  de- 
gree of  safety  which  the  investor  feels  will  characterize 
the  investment  in  that  enterprise,  and  one  of  the  misfor- 
funes  of  the  public  utility  business,  and  it  is  nobody’s 


74 


fault,  as  far  as  that  is  concerned,  that  the  public  utility 
business  for  the  benefit  of  the  community  has  to  be  in 
the  public  mind,  and  certainly  in  politics,  and  one  of  the 
reasons  why  public  utilities  securities  at  this  time  sell  on 
less  basis  than  anything  else,  and  particularly  here  in 
the  City  of  Chicago  is  because  the  public  utility  business 
is  known  to  be  more  or  less  of  a football  in  politics;  in 
other  words,  the  public  utility  business  in  Chicago  is  not 
handled  as  an  ordinary  business  proposition  should  be  in 
the  interest  of  the  people  of  the  City  of  Chicago. 

Now,  I am  not  speaking  of  the  interest  of  the  public 
utility  holders,  but  the  interest  of  the  people  of  the  City 
of  Chicago  where  they  will  be  best  subserved  by  the  best 
business  treatment  of  these  corporations  on  the  part  of 
the  public  officials,  and  it  has  been  my  experience  when 
there  is  injected  into  business  sentiment  argument  de- 
signed to  appeal  to  the  prejudice  of  people  or  designed 
to  divert  their  attention  from  the  business  and  equitable 
propositions  involved,  in  other  words,  under  an  argu- 
ment on  the  square  that  the  distrust  of  the  investor  im- 
mediately follows  in  the  securities.  In  other  words,  that 
the  injection  of  the  street  railway  question  out  on  the 
stump  and  as  an  issue,  it  may  be  necessary,  I do  not 
say  it  is  not  necessary,  but  it  tends  to  discourage  capital 
for  which  there  is  always  competition,  and  if  capital  can 
find  that  kind  of  business  in  which  it  is  not  subject  to 
that  particular  kind  of  attack,  why  it  will  seek  that 
business,  and  the  result  is  that  the  competition  of  other 
business  in  my  judgment  is  somewhat  responsible,  the 
lack  of  feeling  of  confidence  and  safety  in  the  general 
situation. 

That  is  the  situation  as  T find  it,  in  public  utility  se- 
curities. 


In  the  City  of  Chicago  they  say  we  do  not  want  to  buy 
into  a lawsuit,  we  do  not  want  to  buy  into  a political 
wrangle,  and  I have  thought  therefore  in  a general  way 
that  the  Commissions,  the  public  bodies  charged  with 
protecting  the  interests  of  the  people  best  protect  the 
interests  of  the  people  by  assuring  a condition  of  stability. 
You  once  assure  a condition  of  stability  which  gives  the 
investor  in  the  security  a reasonable  feeling  that  his 
status  will  not  he  disturbed  by  political  attack  in  the 
future,  that  will  result  in  capital  becoming  cheaper  to 
public  utilities  and  will  result  in  the  ability  of  the  Com- 
mission fairly  to  lessen  the  charges  upon  the  public. 

Now,  it  is  impossible  to  say  that  six  per  cent  is  suffi- 
cient return  on  street  railroads,  a guarantee  of  six  per 
cent.  If  the  public  is  sure  that  a guarantee  under  this 
form  of  administration,  and  I think  it  will  be  in  time, 
means  six  per  cent,  and  does  not  mean  attack  from  this 
political  organization  or  that  political  organization,  in 
other  words,  that  it  is  a straight  business  proposition, 
capital  will  come  in  to  a certain  extent  into  these  prop- 
erties for  six  per  cent  because  of  the  margin  which  is  al- 
ready invested  and  will  be  a margin  for  security,  but 
you  will  not  get  any  money  invested  in  the  public  utility 
business  in  new  transactions  or  enterprises  for  six  per 
cent,  because  a man  can  get  a better  form  of  security 
where  he  is  perfectly  safe  on  six  per  cent  return,  and  he 
will  not  take  the  risk  in  a doubtful  enterprise  or  new  en- 
terprise to  secure  the  same  return  he  can  get  safely. 

Now,  I think  it  was  characterized  in  the  work  of  this 
Commission.  I think  they  had  led  the  investing  public 
to  believe  that  they  are  fair  so  far  as  the  protection  of 
its  interests  are  concerned.  That  is  indicated  by  all  that 
you  have  done.  In  other  words,  so  far  as  I can  see  this 


76 


Commission  has  handled  the  matter  on  a business  basis, 
and  I for  one  am  getting  to  have  confidence  in  the  judg- 
ment of  the  Commission,  even  though  it  is  necessary  for 
you  from  time  to  time  to  make  these  adjustments.  It  is 
quite  difficult  to  get  people  to  believe  they  are  safe  in  in- 
vesting their  money  if  they  feel  there  should  he  constant 
adjustment  of  the  rates  and  charges,  but  if  they  have  con- 
fidence underneath  that  constant  readjustment,  which  I 
assume  there  must  he,  there  is  the  fixed  determination  to 
treat  capital  with  justice,  not  to  confiscate  and  make  it  a 
political  football,  and  to  run  for  office,  it  is  entirely  pos- 
sible to  get  capital  into  these  investments,  and  I think  the 
Public  Utilities  Commission  of  Illinois  will  take  that  posi- 
tion and  the  people  are  the  ones  who  always  have  to  pay 
the  expense  of  mistakes.  They  have  to  pay  the  expense 
when  politics  are  unjustly  and  improperly  in  a business 
question  where  their  interests  are  at  stake. 

It  all  comes  back  onto  the  public  because  these  public 
utilities  are  going  to  run  some  way  and  the  people  are 
the  ones  who  have  got  to  stand  the  expense  of  their  run- 
ning. 

Then  it  seems  to  me  this  large  amount  of  capitaliza- 
tion which  we  speak  of  is  but  a small  item  in  the  return. 
These  roads  wear  out  every  so,  of  ten,  and  eventually  the 
people  have  got  to  pay  the  cost  of  service,  and  if  the  prop- 
erty is  allowed  to  run  down  under  a mistaken  applica- 
tion of  rate  of  fare,  in  the  long  run  the  people  have  to 
be  charged  for  building  them  up  and  they  suffer  in  serv- 
ice, and  as  I have  looked  at  it,  the  Public  Service  Commis- 
sion of  Illinois  is  impressed  with  the  fact  they  will  repre- 
sent the  people  and  their  attitude  properly  as  represent- 
ing the  people  in  connection  with  this  thing,  is  to  have  that 
policy  and  fix  those  fares  which  will  enable  those  roads 


77 


to  operate  most  cheaply  for  the  benefit  of  the  people  and 
this  rate  of  interest  is  one  of  the  things  that  is  concerned. 
I have  not  gone  into  this  question  in  detail  as  to  the 
amount  of  money  needed  in  Chicago.  Some  one  told  me 
eighty  million  dollars  is  needed  to  put  these  roads  in  a 
condition  to  run  the  most  economically,  and  with  proper 
regard  for  the  service  of  the  pulfiic. 

Commissioner  Lucey:  That  was  all  of  the  utilities, 
everything. 

Mr.  Dawes:  Yes.  Now,  right  here,  we  are  trying  to 
get  some  money  for  another  corporation  in  which  I hap- 
pen to  be  interested,  a very  strong  corporation,  and  it  is 
very  difficult  to  get  money  in  any  large  sums  in  competi- 
tion with  New  York  corporations  at  short  of  seven  and  a 
half  to  eight  per  cent. 

In  answering  what  Mr.  Stuart  said,  it  is  impossible  for 
the  Commission  or  anyone  else  to  determine  with  all  these, 
with  all  these  varying  conditions,  with  high  money  at  this 
time  and  low  money  at  this  time,  just  exactly  what  fixed 
amount  you  have  got  to  allow  the  public  investors  to  come 
into  these  things,  and  I do  not  think  you  can  formulate 
any  fixed  rule. 

The  only  thing  is  to  see  a situation  and  approach  it 
fearlessly,  knowing  that  the  best  interests  of  the  public 
are  subserved  by  correct  treatment  irrespective  of  preju- 
dice, and  that  would  be  in  the  long  run  the  best  way  to  get 
money  back  into  the  public  utilities. 

It  is  difficult  to  coax  it  now. 

I have  been  away  for  two  years  and  when  I got  back 
I found  the  Chicago  City  Railway  bonds  selling  at  62,  and 
they  were  put  out  at  95  to  98. 

The  first  mortgage  bonds  of  the  Chicago  Railways  that 


78 


were  selling  a few  years  ago  at  95  to  par  are  selling 
down  to  G2  or  63.  Now  what  is  the  reason  for  that?  It 
is  largely  because  the  people  have  become  imbued  with 
the  belief  that  they  are  encountering  more  than  the  ordi- 
nary business  risk  in  their  investment,  in  other  words, 
that  they  are  in  jeopardy  from  the  attitude  of  political 
bodies,  and  from  the  fact  this  thing  is  in  politics.  I do 
not  know  how  you  can  take  it  out  of  politics  because 
human  nature  is  human  nature,  and  as  long  as  we  live  in 
a democratic  form  of  government  there  are  going  to  be 
those  that  pose  as  the  true  friends  of  the  people,  and 
as  long  as  they  get  the  ear  of  the  people  they  will  be 
heard,  and  they  should  be  heard,  but  when  our  public 
bodies  are  impressed  with  the  belief  that  ultimately  the 
burdens  and  mistakes  must  fall  upon  the  people  there 
lies  the  hope  of  the  public  utilities,  and  they  are  in  a dis- 
couraging and  distressing  situation  at  the  present  time 
in  Chicago,  especially  street  railways. 

Showing  the  way  this  matter  of  the  interest  rates  af- 
fects how  you  can  get  money.  If  we  have  got  a plant  here 
that  is  worth  one  million  dollars  free  and  clear  and  you 
want  to  raise  one  million  dollars  to  improve  it  and  the 
earnings  are  such  that  the  investor  is  reasonably  satis- 
fied that  he  can  get,  that  he  would  be  paid  his  interest 
rate,  you  can  issue  your  mortgage  bonds  and  sell  them 
at  a fair  rate,  the  element  of  safety  comes  in  there ; but 
if  you  have  first  mortgage  bonds  that  are  on  a closed 
mortgage,  the  conditions  may  be  the  same  as  everything 
else  but  the  form  in  which  the  securities  are  issued.  That 
firm  will  go  broke,  if  it  made  a mistake  in  the  underlying 
mortgage,  so  it  has  to  rely  on  a second  mortgage,  so  it 
cannot  get  its  money. 

These  railroads  in  Chicago  were  all  improperly 


79 


financed.  We  had  a great  shakedown,  a cutdown,  and  we 
thought  that  the  first  mortgage  bonds  that  were  issued 
for  new  money  were  good  bonds,  and  yet  they  are  selling 
at  65  to  88  per  cent  of  the  value  of  new  money,  with 
everything  they  had  behind  it,  and  the  only  answer  to 
that  is  the  attack  of  the  politician  upon  the  street  car 
service,  the  injecting  it  into  campaigns  as  a political 
issue — the  value  of  those  securities,  and  with  all  due  re- 
gard we  would  either  have  to  have  the  city  take  these 
properties  and  operate  them  which  will  mean  immensely 
greater  burden  upon  the  people  eventually,  or  you  have 
got  to  satisfy  them  that  in  some  power  of  government 
there  will  be  always  controlling  it  the  spirit  of  fairness 
to  the  people  themselves  in  connection  with  the  just  ap- 
plication of  law  to  these  public  utility  corporations.  I 
do  not  make  any  plea  for  the  corporations  themselves 
or  anything  of  the  kind,  or  the  security  holders — 
Heaven  knows  they  are  practically  wiped  out  now — hut 
in  the  name  of  that  phrase  so  precious  to  the  politicians, 
‘^the  people  themselves,”  in  the  long  run  it  is  due  to 
somebody  to  be  conservative  and  rocognize  that  the  true 
interest  of  the  people  depends  upon  somebody  standing 
up  against  these  demagogic  and  unfounded  facts  pre- 
sumably and  ostensibly  made  in  their  interest.  It  is  a 
danger  in  this  country  today  that  we  do  not  have  the  argu- 
ment on  the  square  as  to  really  what  is  to  the  interests  of 
the  people  in  the  long  run. 

Commissioner  Lucey:  There  is  not  any  doubt  in  your 
mind  that  the  real  value  is  underlying  these  securities 
you  mentioned,  notwithstanding  the  fact  they  may  be  sell- 
ing in  the  market  at  much  less! 

Mr.  Dawes : Absolutely.  The  first  mortgage  bonds  of 
the  Cliicago  Railways  and  Chicago  City — 


80 


Commissioner  Liicey:  That  property  is  worth  the 
money? 

Mr.  Dawes:  Yes,  there  is  no  question  about  that. 

Commissioner  Lucey:  Those  bonds  ought  to  he  sell- 
ing at  par? 

Mr.  Dawes:  Those  bonds  are  as  good  or  better  than 
the  bonds  Avhich  have  got  to  be  sold  to  give  you  this  new 
capital  to  make  it  possible  for  these  roads  to  serve  the 
public. 

Now,  what  is  that  condition?  You  cannot  say  they  are 
not  safe,  because  I believe  they  are  safe.  I believe  there 
is  that  in  government  which  would  protect  in  spite  of  all 
the  attacks  of  those  endeavoring  to  take  away  the  rights 
of  the  investor,  that  there  is  still  that  force  in  govern- 
ment realizing  that  the  eventual  interest  of  the  people 
depends  upon  the  public  utilities  running  and  running 
right  that  will  protect  those  bonds,  because  it  has  either 
to  be  municipal  ownership,  or  capital  has  got  to  come 
in  at  reasonable  rates  into  these  securities. 

If  they  are  going  to  sell  additional  bonds,  I do  not 
know  where  they  are  going  to  secure  them,  with  the  pres- 
ent bonds  selling  down  to  62  or  65,  that  is  pretty  near  an 
eight  per  cent  basis,  those  five  per  cent  bonds. 

I am  not  a special  pleader,  but  how  in  the  world  you 
are  going  to  get  the  money  at  that  rate  and  charge  a fare, 
I do  not  know,  and  your  public  oi3eration  will  be  a fail- 
ure. That  has  been  my  observation. 

I was  going  to  say,  there  is  an  assertion  and  I apologize 
for  the  assertion,  but  in  my  judgment  I would  say  that 
the  public  operation  will  be  a failure. 

How  can  you  with  your  present  rate  of  fares  and  how 
can  this  Commission,  with  fairness  to  the  public  fix  a high 


81 


enough  fare  so  that  you  can  afford  to  exist  and  extend 
your  roads  on  eight  per  cent  money? 

Now,  the  solution  of  this  thing  is  that  in  some  way  you 
must  re-establish  public  confidence  which  will  result  in 
the  bonds  selling  somewhere  near  what  they  are  worth, 
and  how  you  can  do  it  when  everybody  on  the  street 
balks,  running  up  a blind  alley,  and  saying  there  is  water 
or  Wall  Street  controls  it  and  everything,  I am  up  a 
stump,  as  far  as  my  judgment  is  concerned.  It  is  the 
most  difficult  situation  that  any  public  utility  commis- 
sion has  inside  of  the  Union  today,  the  one  you  con- 
front in  the  City  of  Chicago,  and  the  situation  of  the 
Street  Railways.  I do  not  know  anything  about  the  Tele- 
phone Company.  The  street  railways  is  the  most  criti- 
cal, because  you  are  apparently  in  a position  where  peo- 
ple are  willing  to  play  politics  with  the  railroad  irrespec- 
tive of  the  ultimate  result  and  disastrous  result  to  the 
people. 

Chairman  Wilkerson:  I suppose  the  only  thing  to  do 
is  for  the  Commission  to  follow  the  law,  and  let  the  poli- 
ticians say  what  they  please  about  the  results. 

Mr.  Dawes : I have  every  confidence  that  this  Com- 
mission will  do  that,  and  not  only  in  accordance  with  the 
law,  but  also  the  wise  thing. 

Commissioner  Funk : Of  course.  General,  the  fact  that 
these  bonds  that  have  been  issued  are  below  par,  is  not 
due  to  any  action  of  this  Commission  or  any  similar 
commission.  I take  it  that  the  same  situation  appears  in 
government  bonds. 

Mr.  Dawes  : Exactly  so. 

Commissioner  Funk:  Men  have  invested  their  money 
at  a certain  rate  and  it  has  resulted  after  their  invest- 


82 


nient  that  the  rate  of  interest  has  gone  higher  so  the 
holder  of  a government  bond  or  five  per  cent  Chicago 
Railway  bond  might  sell  his  bond  so  as  to  reinvest  his 
money  at  a higher  rate,  and  the  constant  selling  causes 
decreases.  I do  not  think  we  are  interested  so  much  in 
the  price  of  these  bonds  that  have  besn  issued.  Men  • 
made  their  investment  at  a certain  rate,  that  is,  they 
made  their  bed  and  they  can  sleep  in  it,  but  our  problem 
is  to  the  financing  of  these  utilities  today  and  in  the  im- 
mediate future. 

Mr.  Dawes:  I only  use  that  as  an  illnoLration  of  the 
fact  that  these  securities  are  less  in  my  judgment  because 
of  the  constant  political  agitation  of  the  street  car  situa- 
tion in  Chicago. 

These  first  mortgage  bonds  are  closely  held  bonds,  that 
is,  it  is  the  small  investor  who  holds  it.  That  is  not 
at  all  the  situation  with  government  bonds  at  all,  be- 
cause it  is  not  a question  of  the  government  being  in- 
volved. It  is  a question  of  oversupply  pressing  on  the 
market  at  this  time. 

Now,  you  will  find  bonds  are  selling  now  on  five  and  a 
half  per  cent  basis  in  corx)orations,  not  public  utility 
corporations,  but  it  is  because  so  few  are  offered,  they 
have  good  will  and  people  do  not  like  to  change  their 
investment,  and  they  see  the  things  in  connection  with  the 
securities  which  were  considered  first  class  securities  at 
the  time  they  were  issued,  and  there  was  wide  distribu- 
tion, and  it  is  not  due  to  the  fact  of  the  interest  rate  hav- 
ing advanced  so  altogether,  but  it  is  because  they  have 
lost  confidence  in  the  stability  of  the  street  car  situation 
here  in  Chicago. 

It  was  pointed  out  that  the  Chicago  Railway  first  5s 
at  62  yields  131  per  cent  on  the  investment  if  carried 


83 


through.  It  is  impossible  for  you  to  finance  these  roads 
a't  any  such  cost  as  that,  and  just  how  this  Commission  is 
going  to  take  any  action  which  makes  it  possible  to  finance 
these  roads,  it  does  not  seem  to  me  they  can  do  it.  You 
cannot  put  in  such  a rate  of  fare  here  in  justice  to  the 
public  with  13i  per  cent  money.  What  is  the  answer  to 
those  things?  The  answer  is  one  which  you  probably 
won’t  have. 

If  this  situation  could  be  treated  without  the  standpoint 
of  petty  politics  or  municipal  politics  or  state  politics, 
so  the  investors  would  have  the  confidence  that  the  gen- 
eral status  quo  was  going  to  be  held,  that  would  be  dif- 
ferent. 

Commissioner  Shaw : In  an  order  recently  issued  by 
the  Tennessee  Commission  involving  street  car  fares  in 
the  City  of  Memphis,  the  Commission,  after  making  a 
finding  as  to  the  fair  value  of  property,  proper  allow- 
ance for  operating  expenses,  depreciation  and  rate  of  re- 
turn, in  addition  thereto,  provided  there  should  be  cre- 
ated what  was  termed  an  emergency  fund,  we  will  say 
there  should  be  built  up  from  earnings  after  all  these 
other  conditions  have  been  taken  care  of,  say  five  hun- 
dred thousand  dollars  for  illustration,  that  that  should 
be  contributed  to  that  fund  up  until  it  arrived  at  seven 
hundred  thousand  dollars,  then  there  should  he  a reduc- 
tion. In  other  words,  the  fund  should  be  held  between 
five  hundred  thousand  and  seven  hundred  thousand  and 
carried  there  for  emergency  pui’poses. 

Now,  I would  like  to  know  if  in  your  experience  and 
judgment  involving  securities  whether  any  such  scheme 
as  that  would  tend  to  stabilize  securities. 

Mr.  Dawes:  I do  not  know  as  I fully  got  exactly  in 


84 


my  mind  what  that  is.  This  fund  would  bo  created  out  of 
the  net  earnings? 

Commissioner  Shaw:  It  would  he  charged  to  operat- 
ing expenses  over  and  above  the  other  charges  that  I men- 
tioned. Simply  carried  there  for  the  purpose  of  an  emer- 
gency fund,  and  emergency  conditions. 

Mr.  Dawes:  I think  that  whole  problem  of  deprecia- 
tion is  one  of  the  most  difficult — 

Commissioner  Shaw : That  is  not  a depreciation  fund. 

Mr.  Dawes : It  is  not  a depreciation  fund,  it  is  an 
addition  to  that? 

Commissioner  Shaw:  It  is  separate  and  apart  from 
the  depreciation  fund,  purely  an  emergency  fund;  they 
have  taken  care  of  all  those  and  simply  carry  it  there  as 
an  emergency  fund  to  meet  unforeseen  emergencies,  as  I 
understand  the  scheme  of  the  order. 

Mr.  Dawes : I am  not  an  expert  on  those  things  and  I 
do  not  suppose  my  public  utility  friends  would  approve 
that,  but  it  might  be  a very  good  scheme  in  connection 
with  these  things  to  provide  a fund,  hanging  between,  you 
might  say,  for  emergencies  to  act  as  a stabilizer,  like  a 
governor  on  a steam  engine.  It  Avould  strike  me  offhand 
that  might  be  a very  good  idea  in  connection  with  it.  In 
other  words,  there  could  be  suspended  between  the  public 
and  the  investor  that  fund  to  which  the  investor  would 
not  have  title  unless  needed  for  protection.  I think  that 
is  a good  scheme.  In  other  words,  then  the  politicians, 
you  see,  could  argue  all  they  please  on  the  other  side  of 
that  fund,  inside  of  this  fund  in  which  it  would  ruin  the’ 
investor  and  stop  the  flow  of  money.  I think  that  is  a 
good  scheme. 

In  other  words,  let  them  take  their  hands  off  the  fellow 


85 


that  is  going  to  put  in  new  money  and  not  raise  up  the 
bogey  man  and  scare  him  out. 

You  have  to  do  something  of  that  sort. 

Commissioner  Lucey:  Have  you  in  your  mind  the 
value  of  the  public  utility  securities  outstanding  in  the 
country? 

Mr.  Dawes : No,  I have  not.  I have  had  so  much  trou- 
ble with  what  I have  had  out,  I have  not  had  time  to 
find  out. 

Mr.  Dunbaugh:  We  can  get  that  information  for  you 
by  the  next  hearing. 

Commissioner  Lucey:  I think  that  would  be  a good 
thing  to  get  that  and  show  it,  and  also  show  what  propor- 
tion they  held  as  a permanent  fund,  permanent  securities. 

Chairman  Wilkerson:  I think  there  was  a report  of 
some  Board  in  Washington  a few  months  ago,  in  which 
that  information  is  tabulated. 

Mr.  Dawes : I would  like  to  have  some  of  you  gentle- 
men representing  the  city  ask  me  some  questions. 

Mr.  Cleveland : We  are  going  to  accept  your  invitation 
with  the  greatest  pleasure,  and  just  as  soon  as  the  week 
after  next  comes  there  will  be  nothing  give  us  greater 
pleasure  than  to  ask  you  some  questions. 

Mr.  Dawes  : I really  would  like  to  get  your  ideas.  You 
asked  Mr.  Stuart  some  questions.  I would  like  to  have 
you  ask  me  some  now. 

Mr.  Cleveland:  We  will  ask  you  at  the  proper  time. 

Chairman  Wilkerson:  You  may  proceed  now  if  you 
desire. 

Mr.  Cleveland:  No,  we  will  cross-examine  with  refer- 
ence to  the  stump  speech  just  the  same  as  we  do  the 


86 


others.  We  will  put  it  off  until  the  week  after  next.  We 
will  cross-examine  him. 

Mr.  Dawes : I suppose  I have  probably  given  oppor- 
tunity for  some  stump  speeches,  to  inject  them  if  you  can^ 
but  let  me  tell  you  that  if  your  idea  of  cross-examining 
me  is  your  idea  of  cross-examining  somebody  who  is  run- 
ning for  office,  that  I will  not  submit  to  it.  I will  testify 
as  to  the  general  conditions  and  to  the  conditions  of 
rates  and  fares  and  condition  of  the  street  car  companies 
in  the  City  of  Chicago. 

If  you  want  to  examine  me  as  to  my  private  business 
and  all  of  that  sort,  is  that  your  proposition? 

Mr.  Cleveland:  Our  purpose  is  going  to  be  to  ask 
you  with  reference  to  the  facts  and  ask  you  to  kindly 
tell  the  truth. 

Mr.  Dawes:  Yes,  that  is  the  point,  but  I will  not  be 
put  on  trial  for  political  purposes  by  you  or  anybody 
else.  I am  not  a politician.  I am  not  in  that  particular 
kind  of  business. 

Mr.  Cleveland : We  had  not  any  idea  you  had  anything 
you  wanted  to  conceal.  We  will  try  not  to  bring  out  any- 
thing you  want  to  conceal. 

Mr.  Dawes : I have  noticed  the  fair  way  in  which  you 
have  directed  all  arguments  on  the  street  car  question, 
and  I want  to  say,  as  an  individual,  I do  not  want  to  be 
subjected  to  such  things. 

Mr.  Cleveland : I know  you  do  not  want  to  be  sub- 
jected to  cross-examination,  but  on  your  invitation  you 
will  be. 

Mr.  Dawes : I think  I might  possibly  survive  it. 

(Whereupon  a short  recess  was  taken.) 


87 


Chester  Corey,  a witness  lierein,  having  been  first  duly 

sworn,  testified  as  follows  : 

Mr.  Bangs : Will  you  give  your  name  and  position, 
please? 

Mr.  Corey:  Chester  Corey,  vice-president  of  the  Har- 
ris Trust  & Savings  Bank. 

Mr.  Bangs : State  your  general  experience,  briefly. 

Mr.  Corey:  I have  been  in  the  bond  business  for  be- 
tween twenty-five  to  thirty  years.  The  question  is  asked 
what  is  the  situation  with  reference  to  the  demand  for 
capital  by  industrial  concerns  and  public  utilities? 

I would  like  to  call  the  Commission’s  attention  to  the 
fact  that  in  the  four  weeks,  beginning  March  22,  1920, 
there  were  actual  issues  of  notes  and  bonds  of  various 
kinds  of  public  utilities  and  industrials  brought  out  to 
the  amount  of  $245,890,000  of  major  issues.  There  may 
have  been  some  minor  issues  we  have  no  record  of. 

Mr.  Cleveland:  Is  that  in  the  whole  country  or  Chi- 
cago ? 

Mr.  Corey : In  the  whole  country.  I will  give  you  the 
list. 


MEMORANDUM  OF  RECENT  SHORT  TERM  ISSUES. 


ISSUE — Amount  Rate  % Maturity  Price  Yield 


Week  of  March  22d — 

Dayton  Power  & Light  Co $ 2,000,000 

Eastern  Wisconsin  Elec.  Co. . . . 1,200,000 

Cuba  Railroad  Company 1,700,000 

Canadian  Northern  Ry.  Co....  12,000,000 
Canadian  Pacific  Railroad 12,000,000 

Cleveland  Metal  Products 4,000,000 

Continental  Motors  Corp 5,000,000 

Western  Electric  Co.,  Inc 25,000,000 

Anglo-American  Oil  Co 15,000,000 

Week  of  March  29th — 

Union  Elec.  Lt.  & Fr.  Co 2,500,000 

United  Lt.  & Ry.  Co 2,000,000 


Bell  Telephone  Co.  of  Canada..  5,500,000 
Hooker  Electro  Chemical  Co..  1,000,000 
Week  of  April  5th — 


Pennsylvania  R.  R.  Co 50,000,000 

New  York  Central  R.  R 36,225,000 

B.  F.  Goodrich  Co 30,000,000 

Consolidated  Textile  Corp 3,000,000 

Week  of  April  12th — 

Associated  Simmons  Hdw.  Co. . 7,500,000 

Air  Reduction  Co.,  Inc 2,000,000 

Oklahoma  Gas  & Elec.  Co 765,000 

Ohio  State  Telephone  Co 1,000,000 

Southwestern  Bell  Tel.  Co 25,000,000 

Milwaukee  El.  Ry.  & Lt.  Co 2,000,000 


7 

1923 

98% 

$7.50 

7 

1923 

98 

7.75 

7 

1920-30 

7.50 

51/2 

1924 

6.90 

6 

1920-32 

99% 

6.75- 

6.625 

7 

1930 

971/2 

7.35 

7 

1922-25 

100 

7.00 

7 

1925 

981/2 

7.35 

71/2 

1925 

100 

7.50 

7 

1923 

97% 

8.00 

7 

1922 

98 

8.00 

7 

1925 

98 

7.50 

7 

1922 

98% 

7.75 

7 

1930 

100 

7.00 

7 

1921-35 

100 

7.00 

7 

1925 

981/4 

7.40 

7 

1923 

981/2 

7.50 

7 

1925 

98 

7.50 

7 

1930 

97 

7.45 

7 

1921 

98.72 

8.00 

7 

1920-25 

99.76 

7.50- 

8.00 

7 

1925 

971/2 

7.60 

7 

1923 

98% 

8.00 

89 


Commissioner  Lucey:  What  period  of  time? 

Mr.  Corey:  The  four  weeks  beginning  March  22,  1920. 

Commissioner  Lucey:  Public  utilities  securities? 

Mr.  Corey:  And  industrials.  The  highest  priced  se- 
curity brought  out,  that  is  the  lowest  yield  was  certain 
particular  securities  of  the  Canadian  Pacific  Railway 
equipment  bonds.  They  were  issued  as  serial  bonds, 
and  they  were  brought  out  to  yield  from  six  and  five- 
eighths  to  six  and  three-quarters  per  cent.  There  were 
a number  of  issues  brought  out  so  that  the  investor  could 
get  an  eight  per  cent  yield. 

While  I have  not  attempted  and  it  would  be  a very 
difficult  thing  to  get — I do  not  mean  difficult,  but  I have 
not  taken  the  time  to  get  a weighted  average,  I think  it  is 
safe  to  say  that  the  average  yield  was  not  far  from  seven 
and  a half  per  cent. 

Mr.  Cleveland:  Do  you  mean  yield  to  the  investor? 
The  net  yield  to  the  ultimate  investor  ? 

Mr.  Corey:  Yes. 

Mr.  Cleveland:  Or  does  that  include  commissions? 

Mr.  Corey:  No.  The  net  yield  to  the  ultimate  in- 
vestor. 

I will  come  in  a moment  to  the  cost  to  the  company. 
That  money  cost  the  borrowing  corporations  from  a min- 
imum of  6.90'  to  a maximum  of  lOf  and  the  average,  I 
am  very  sure  is  not  very  far  from  eight  and  a half  per 
cent. 

The  Canadian  Pacific  was  the  first  of  the  important 
corporations  during  this  period  to  bring  out  their  financ- 
ing and  they  got  the  cheapest  money.  A good  many  of 
the  securities  on  this  list  can  be  bought  today  for  lower 
prices  than  those  at  which  they  were  brought  out. 


90 


Now,  the  question  comes  from  the  standpoint  of  the 
man  responsible  for  the  financial  management  of  any  cor- 
poration, either  industrial  or  public  utility,  can  he  af- 
ford to  take  money  for  which  he  must  pay  we  will  say  an 
average  of  eight  and  a half  per  cent,  in  some  cases  more 
and  in  some  cases  a little  less,  unless  he  has  a pretty  good 
assurance,  unless  he  can  at  least  get  his  hat  back  on  that 
money.  I do  not  think  that  needs  to  be  enlarged.  The 
question  of  going  out  and  borrowing  money  and  paying 
eight  and  a half  per  cent,  what  is  the  object  of  taking  it 
and  getting  it  if  you  cannot  at  least  get  your  hat  back. 

I mean  by  that  if  you  borrow  money  at  eight  and  a half 
per  cent  and  invest  it  at  eight  and  a half  per  cent,  you 
are  getting  what  I call  your  hat  back.  You  come  in  the 
door  and  go  out  the  door.  If  you  borrow  it  at  eight  and  a 
half  and  get  ten  per  cent  why  you  get  something. 

There  is  one  very  fundamental  difference,  it  seems 
to  me,  between  industrial  financing  and  public  utility 
financing  as  they  are  both  practiced  today,  espe- 
cially as  regards  the  notes  or  bonds  that  each  of  them 
put  up.  The  theory  of  industrial  financing,  as  regards 
bonds,  is  the  payment  of  the  bond,  by  the  extinguishment 
of  the  debt.  The  theory  of  public  utility  financing  not 
necessarily  because  it  is  the  correct  theory,  but  because 
it  is  the  only  possible  theory,  is  when  a debt  becomes  due, 
it  is  refunded.  Now,  any  gentleman  in  this  room  who 
has  had  a banking  experience,  knows  what  I mean  when 
I refer  to  the  class  of  borrower  who  is  a steady  boarder  ; 
he  may  be  good  in  the  sense  that  he  owns  more  than  his 
debts,  but  he  is  never  able  to  pay  his  debts.  He  has  to 
keep  on  refunding  them.  That  is  your  public  utility. 

Your  industrial,  insofar  as  it  borrows  money  by  the 
use  of  bonds  or  notes,— there  may  be  exceptions,  I am 


91 


dealing  with  common  customs — borrows  that  money 
on  the  understanding  that  though  the  operation  of  serial 
maturities,  or  through  the  operation  of  sinking  funds 
that  money  is  to  be  repaid  and  the  debt  extinguished.  I 
think  that  element  is  one  of  the  reasons  why  the  indus- 
trial note  or  bond  has  been  a popular  form  of  invest- 
ment, especially  during  the  last  two  years. 

Mr.  Cleveland : Could  I ask  one  question,  just  to  clear 
up  something? 

Chairman  Wilkerson:  Sure. 

Mr.  Cleveland:  Do  the  industrials  figure  that  their 
earnings  will  take  care  not  only  of  the  interest,  but  pay 
the  principal? 

Mr.  Corey:  Yes.  They  have  no  other  source  of  money 
except  this.  Of  course  some  industrial  issues  and  some 
public  utilities  issues,  for  that  matter,  come  out  as  con- 
vertible issues,  where  promise  to  pay  is  convertible  into 
non-forecloseable  obligations,  that  is,  stock.  So  my  state- 
ment is  open  to  that  variation,  if  you  please. 

Mr.  Cleveland:  Yes. 

Mr.  Corey:  But  that  is  turned  from  a non-maturing, 
non-forecloseable,  non-enforceable,  obligation  into  a piece 
of  paper  which  is  in  effect  an  interest  in  the  business,  a 
partnership. 

Mr.  Cleveland:  The  industrials  figure  their  earnings 
will  take  up  their  obligations  as  they  go  along? 

Mr.  Corey:  Yes,  and  the  public  utilities  do  not  be- 
cause they  cannot,  or  at  least  that  is  one  reason. 

The  question  of  any  company,  industrial  or  public 
utility,  borrowing  money,  is  not  a question  of  theory. 
It  is  a question  of  hard,  cold  facts,  can  they  get  it,  can 
they  get  somebody  to  let  them  have  it,  and  what  will  they 


92 


pay  for  it,  and  the  elements,  as  I see  it,  that  enter  into 
the  public  utilities,  the  fundamental  elements,  are  not 
very  numerous,  nor  very  complicated. 

No  public  utility  can  in  my  opinion  enjoy  credit  which 
has  no  means  of  obtaining  money  for  capital  expendi- 
tures for  extensions,  other  than  by  borrowing.  The  cor- 
poration who  must,  in  order  to  pay  for  extensions  and 
additions,  in  order  to  pay  for  the  development  of  its  busi- 
ness, the  corporation  that  must  borrow  all  the  money  that 
it  needs  for  this  purpose,  year  in  and  year  out  is  destined 
for  the  financial  grave  yard,  absolutely.  It  may  take  it 
some  time  to  get  there,  it  may  take  some  corporations 
longer  than  others,  but  a corporation  to  permanently  en- 
joy credit,  must  have  other  means  of  getting  money,  and 
those  other  means  are  preferably  two,  one  is  proceeds 
from  the  sale  of  stock  and  the  other  is  some  excess  of 
earnings  which  are  available  for  capital  investment,  and 
unless  a public  utility  corporation  can  show  in  earnings 
a condition  sufficient  to  pay  those  operating  expenses, 
taxes,  to  provide  for  maintenance  and  full  depreciation, 
to  pay  its  charges,  to  pay  dividends  on  that  part  of  its 
investment  represented  by  stock,  and  leave  a comfortable 
surplus,  the  credit  position  of  that  company  is  not  satis- 
factory even  though  because  of  a small  bonded  debt,  it 
may  be  able  to  go  out  and  borrow  some  more  money. 

Unless  you  have  a corporation  that  earns  $100  after  the 
payment  of  the  operating  expenses  and  fully  provides  for 
maintenance  and  depreciation,  and  that  corporation  pays 
out  eighty  dollars  of  that  hundred  dollars,  as  fi^ed 
charges,  as  interest  on  debt  that  has  to  be  paid  off, 
there  is  a receivership  and  trouble,  nine  times  out  of  ten 
that  company  has  no  credit.  If  that  same  eighty  dollars 
is  paid  out,  for  the  sake  of  figures,  forty  dollars  in  inter- 


93 


est  and  forty  dollars  in  dividends,  that  company  has  very 
strongly  established  credit,  so  that  the  problem  of  the 
public  utility  is  not  simply  the  problem  of  what  they  have 
to  pay  to  go  out  and  borrow  money,  it  is  a problem  of 
keeping  the  house  in  order,  so  as  years  go  by  they  are 
able  to  go  out  and  get  money,  regardless  of  the  price  they 
have  to  pay  for  it,  and  unless,  as  the  years  go  by,  the  pub- 
lic utilities  can  put  in  a certain  amount  of  the  money  from 
the  sale  of  stock  or  from  the  earnings,  or  preferably 
both,  the  time  is  going  to  come  when  they  just  cannot  get 
money. 

I had  not  been  asked  to  say  this  by  anybody  but  I think 
I would  like  to  point  out  to  you,  gentlemen,  this  phase 
of  it. 

The  bonds  of  the  Chicago  Telephone  Company  become 
due  December  1,  1923.  That  is  three  and  a half  years. 
When  that  time  comes — two  years  and  a half — when  that 
time  comes  if  the  Chicago  Telephone  Company  is  going 
to  get  away  with  that  financing  at  all  on  any  kind  of  re- 
spectable basis,  it  has  got  to  have  credit,  and  whether 
it  has  credit  or  not,  it  seems  to  me  is  more  or  less  de- 
pendent upon  the  treatment  that  it  receives  from  the 
state,  and  therefore  the  problem  of  the  Chicago  Tele- 
phone Company  with  all  its  bonds  maturing  then,  is  a 
little  different.  It  seems  to  me  the  company  requires 
a little  different  treatment  than  if  its  bonds  ran,  we  will 
say  to  1940  and  the  problem  was  the  raising  of  five  mil- 
lion dollars  or  ten  million  dollars  or  fifteen  or  twenty  mil- 
lion dollars,  whatever  it  is  they  need  from  year  to  year, 
because  two  years  and  a half — 

When  did  you  say  those  bonds  came  due? 

Mr.  Sunny:  December  1,  1923. 

Mr.  Corey:  That  is  three  and  a half  years,  yes 


94 


Mr.  Corey:  As  regards  this  second  question,  will  liv- 
ing conditions  and  the  general  business  situation  in  Chi- 
cago be  affected  by  the  inability  of  public  utilities  to  se- 
cure capital  for  extensions  and  betterments? 

Why  unless  somebody  insists  I am  not  going  to  try 
to  argue  that.  I think  the  answer  is  perfectly  patent. 

Chairman  Wilkerson:  You  think  that  question  an- 
swers itself? 

Mr.  Corey:  I think  so. 

I think  I have  taken  up  all  your  time  I want  to. 

Commissioner  Lucey.  Is  it  your  understanding,  Mr. 
Corey,  or  rather,  isn’t  it  the  understanding  that  invest- 
ment in  the  shape  of  bonds  or  stocks  of  public  utilities 
are  never  intended  to  be  repaid,  that  is,  they  are  not 
intended  to  be  wiped  out?  The  theory  here  is  to  allow 
them  to  continue  as  permanent  investments? 

Mr.  Corey : There  is  no  question  about  that.  To  just 
what  extent  that  theory  is  sound  I would  say  depends 
principally  upon  the  extent  to  which  the  security  of  the 
investment  is  guaranteed.  You  go  out  and  buy  bonds 
of  the  X Y Z Company,  you  take  your  chance,  the  com- 
petition of  a thousand  and  one  things  that  enter  into  a 
commercial  enterprise.  You  buy  the  bonds  of  a public 
utility  and  there  are  a good  many  safeguards  and  pro- 
tections thrown  around  them  by  the  state.  If  the  state 
is  going  to  fall  short  by  looking  after  these  investors  on 
the  one  point,  which  is  the  actual  safety  of  his  money — 
he  is  dissatisfied  and  he  won’t  make  that  kind  of  invest- 
ment. He  may  not  analyze  it  and  say  he  is  dissatisfied 
with  the  theory  of  refunding,  or  the  lack  of  it,  but  he 
does  not  want  to  put  his  money  into  something  where 
there  is  any  doubt  about  the  prompt  payment  of  his  prin- 


95 


cipal  and  interest  and  the  credit  of  the  corporation,  so 
that  his  securities  will  have  a market  value  based  on 
market  conditions  and  not  based  on  some  artificial  con- 
dition. 

Commissioner  Lucey : Why  should  there  be  a different 
rule  with  the  industrial  company  which  is  a money  mak- 
ing company,  and  the  utility  which  is  theoretically  at 
least  supposed  to  be  making  money  for  its  stockholders? 
Why  should  there  be  a different  rule?  Why  should  not 
the  debts  of  the  public  utility  be  paid  off  at  some  time? 

Mr.  Corey:  Why,  I think  there  you  are  opening  up 
a very  broad  question.  If  the  community,  through  fares 
or  rates,  whatever  you  may  call  them  dependent  upon  the 
class  of  company  it  is,  wants  to  return  the  investment  to 
the  man  who  has  made  it,  I do  not  see  anything  funda- 
mentally wong,  but  it  is  certainly  wrong  to  take  it  away 
from  him  without  paying  it  back  to  him. 

Commissioner  Lucey:  On  that  so-called  American 
plan,  isn’t  there  the  danger  of  the  continual  increase  of 
bonds  or  stocks  or  credit,  as  you  may  term  them,  so  that 
after  a certain  number  of  years,  the  sum  of  the  whole 
will  certainly  exceed  the  value  at  that  time  in  the  prop- 
erty, and  then  on  the  theory  of  granting  a return,  which 
return  will  have  to  be  a sum  of  money  sufficient  to  pay  in- 
terest on  the  indebtedness  and  rate  of  profit  on  the  in- 
vestment, if  all  rehabilitations  are  going  to  be  made  out 
of  the  issues  either  of  stocks  or  bonds? 

Mr.  Corey:  Well,  I don’t  know  as  I can  fully  get  your 
idea,  but  there  is  this  practical  situation,  that  if  a cor- 
poration has  not  enough  credit  to  sell  stock  it  may  have, 
enough  credit  to  sell  bonds,  and  if  it  has  to  have  money 
it  naturally  avails  itself  of  its  one  method  of  raising 
money,  and  that  unquestionably  has  a tendency  to  pile  up 


96 


an  undue  amount  of  fixed  indebtedness.  I do  not  know 
whether  that  answers  your  question.  I do  not  know  as 
I grasped  it. 

Commissioner  Shaw:  Mr.  Corey,  the  Chicago  Tele- 
phone Company  is  now  before  the  Commission  in  a rate 
proceeding.  According  to  the  record  they  have  now  to 
the  credit  for  depreciation  about  twenty  million  dollars 
which  is  invested  in  property.  Assuming  that  is  true, 
would  that  better  the  credit  of  the  company  or  should  it 
not  improve  the  credit  of  the  company,  the  depreciation 
having  been  gotten  from  the  consumers'? 

Mr.  Corey:  I do  not  know  that  I fully  grasp  just  what 
you  mean. 

The  company  may  be  carrying  on  the  liability  side  of 
its  balance  sheet  a reserve  of  what  amount,  did  you  sayT 

Commissioner  Shaw:  Twenty  million  dollars. 

Mr.  Corey:  All  right,  twenty  million  dolars. 

Commissioner  Shaw:  Suppose  the  value  today  is 
eighty-six  million  dollars  and  the  outstanding  securities 
are  sixty-six  million  dollars. 

Mr.  Corey:  Yes. 

Commissioner  Shaw:  Necessarily  then  the  deprecia- 
tion reserve  would  be  represented  in  property  if  the  com- 
pany is  operating. 

Mr.  Corey:  Surely.  Now,  what  is  your  question? 

Commissioner  Shaw:  Would  that  not  improve  the 
credit  of  the  company  and  should  it  not  improve  the 
credit  of  the  company  when  it  comes  to  selling  securities  ? 

Mr.  Corey : There  is  no  question  about  it,  but  you  are 
not  dealing  with  a theory,  you  are  dealing  with  hard, 
cold  facts  when  the  company  comes  to  borrow  money,  it 


97 


must  pay  the  going'  rate,  or  else  it  is  going  to  go  without 
the  money,  because  concerns  that  are  on  that  list,  some 
of  the  concerns  have  international  credit.  The  public 
utility  whose  financial  condition  today  is  precarious  is 
probably  in  a position  where  they  cannot  get  money. 
Whether  they  will  pay  eight,  nine  or  ten  per  cent. 

Commissioner  Shaw:  That  condition  in  a measure 
would  meet  your  argument,  that  it  is  not  sound  financially 
for  the  company  in  the  public  utility  business  to  have  all 
the  property  represented  in  outstanding  securities! 

Mr.  Corey:  No,  that  was  not  my  argument,  sir. 

Commissioner  Shaw:  I misunderstood  you. 

Mr.  Corey:  No,  my  argument  is  to  draw  a very  dis- 
tinct line  between  the  bond  or  obligation,  the  promise  to 
pay  and  the  partnership  interest,  in  other  words,  stock ; 
and  I can  see  no  reason  why  any  company  of  any  kind 
should  not  have  out  capital  obligations  to  the  full  amount 
of  investment.  In  fact,  it  seems  to  me,  it  would  be  fool- 
ish if  they  did  not  have. 

I was  speaking  of  the  danger  of  an  undue  preponder- 
ance of  funded  debt  in  an  attempt  to  draw  a sharp  line 
between  the  two  forms. 


David  R.  Forgan,  a witness  herein,  having  been  first  duly 
sworn,  testified  as  follows : 

^Mr.  Dunbaugh:  Will  you  state  your  name  for  the  rec- 
ord, and  just  briefly  your  banking  experience  and  then 
proceed  to  answer  the  questions  that  have  been  asked  of 
the  other  witnesses. 

Mr.  Forgan:  David  R.  Forgan,  president  of  the  Na- 
tional City  Bank  of  Chicago.  I have  been  in  the  bank- 


98 


ing  business  43  years,  in  other  words,  ever  since  I left 
school  at  15. 

Answering  the  first  question,  what  is  the  situation 
with  reference  to  the  demand  for  capital  by  industrial 
concerns  and  public  utilities,  I would  say  that  never  in 
my  experience  have  I seen  so  great  a demand  for  perma- 
nent financing  on  the  part  of  industrial  companies  and 
public  utilities.  The  demand  for  credit  has  extended  our 
credit  facilities  in  this  country  to  the  limit.  I thought 
when  the  Federal  Reserve  bank  was  established  that  we 
would  probably  never  see  the  time  when  the  reserves 
against  liabilities  set  by  the  law  for  the  federal  reserve 
banks  would  be  reached. 

We  went  through  the  war  without  getting  anywhere 
near  reaching  them.  Today  we  have  reached  them.  The 
Federal  Reserve  Act  places  forty  per  cent  reserves 
against  the  federal  reserve  liabilities  as  the  low  mark, 
subject  to  a further  provision  that  they  may  go  down 
to  thirty-three  per  cent  on  an  increasing  scale  of  fines 
or  paying  a tax,  you  might  call  it. 

The  Federal  Reserve  bank  today  of  Chicago  is  under 
the  forty  per  cent  mark.  At  least  it  was  the  last  time  I 
heard  of  it,  a few  days  ago. 

The  Federal  Reserve  Bank  of  Chicago  today  has  itself 
borrowed  over  forty  million  dollars  from  other  reserve 
banks  in  the  country  that  are  not  feeling  the  strain  so 
much  as  we  are  here  in  Chicago.  In  these  circumstances 
what  we  call  money  or  credit  is  very,  very  scarce  and 
very  expanded.  I would  like  to  see  the  loans  in  my  own 
bank  for  example  reduced  twenty-five  per  cent  if  I knew 
any  way  of  doing  it.  I do  not  know  of  a bank  in  Chi- 
cago that  would  not  say  the  same,  thing.  Now,  in  these 
circumstances,  when  you  come  to  ask  this  further  part 


99 


of  this  question,  what  are  the  present  rates  for  perma- 
nent financing,  well,  I suppose  you  heard  other  exam- 
ples here,  but  you  can  pick  up  any  offering  of  any  bond 
house  and  get  such  securities  as  the  five  year  notes  of  the 
Western  Electric  Company  at  seven  and  three-eighths 
per  cent. 

I saw  lately  an  offering  of  public  utility  bonds  for  sev- 
eral companies,  all  of  which  were  owned  and  operated  by 
Stone  & Webster  of  Boston  and  Chicago  and  other  places-, 
and  Stone  & Webster  stand  very  high  as  operating  engi- 
neers and  owners  of  public  utilities,  and  every  one  of 
these  companies  were  offering  the  securities  to  pay  over 
eight  per  cent,  from  eight  to  eight  and  three-quarters, 
of  Stone  & Webster  ’s  owned  and  operated  securities. 

Of  course,  this  is  very  unusual  and  you  might  say  it 
might  be  temporary.  The  trouble  is  that  it  is  not  tem- 
porary. 

As  far  as  any  one  can  see  now  there  mil  be  very  little 
let-up  in  the  situation,  I hope  for  some,  but  there  will 
be  very  little  in  the  next  two  or  three  months,  and  then 
we  have  the  fall  crop  moving  situation  on  top  of  it  all, 
which  always  causes  a still  further  expansion  of  credit,  so 
you  see  while  today  it  is  very  difficult  indeed  for  any  in- 
dustrial or  public  utility  to  borrow  money  at  all,  if  they 
do  borrow  money  they  wifi  have  to  offer  to  the  public,  the 
security  at  at  least  seven  and  a half  per  cent,  and  that 
of  course  would  cost  the  company  the  commissions  which 
must  be  paid  to  the  houses  that  distribute  these  securi- 
ties, which,  generally  speaking,  would  be  at  least  one  per 
cent  more.  So  that  I do  not  think  that  any  corporation 
or  public  utility  no  matter  how  sound  might  be  its  condi- 
tion could  borrow  in  the  way  of  permanent  financing, 
three  or  four  or  five  years,  or  more,  today,  at  less  than 
eight  and  a half  per  cent. 


100 


Now,  the  next  part  of  the  question,  gentlemen,  is  rather 
a difficult  one,  what  rate  of  return  must  utility  properties 
earn  in  order  to  attract  new  capital. 

I presume  by  capital  is  meant  what  the  term  means, 
that  is,  stock  capital,  not  money  on  bonds.  There  is  a 
great  difference  between  bonds  and  stock.  The  man  who 
buys  the  bond  of  a concern  becomes  its  creditor  and  has 
in  his  position  its  promise  to  pay  the  money  with  in- 
terest. 

The  man  who  buys  stock  in  a concern  becomes  a part- 
ner in  that  concern  and  liable  to  a certain  extent  for  the 
debts  of  the  concern.  In  the  case  of  hanks,  for  example, 
he  is  liable  for  twice  the  amount  of  his  holdings,  so  there 
is  a big  difference  between  buying  bonds  and  stock.  I 
do  not  know  what  rate  would  have  to  be  offered  for  pub- 
lic utilities  today  to  induce  people  to  buy  stock.  I do 
not  think  you  can  induce  me  to  buy  at  any  price,  although 
I might  be  inclined  to  buy  the  bonds.  Anybody  who  is  not 
now  a partner  in  public  utilities  I think  would  need  a 
guardian  if  he  wants  to  become  one  because — I am  saying 
that  with  all  due  respect — ^because  public  utilities  are  in 
this  market  looking  for  money,  cities  are  growing,  facil- 
ities must  be  added  to,  telephone  companies  must  continu- 
ally put  in  telephones  for  new  subscribers,  for  example, 
and  they  are  in  the  market  competing  with  industrial  con- 
cerns that  are  making  thirty  and  forty  per  cent  on  their 
capital  and  who  can  show  such  earnings  for  years  back, 
and  that  is  why  I say  public  utilities  cannot  afford  to 
make  such  return.  It  would  not  be  right,  it  would  not  be 
fair  to  the  public  that  they  should  be  allowed  to  make 
the  same  kind  of  returns  that  the  ordinary  industrial  con- 
cerns are  making  today;  no  one  would  advocate  such  a 
thing,  but  still  when  they  come  into  the  money  market 


101 


for  money  they  are  competing  with  these  industrial  con- 
cerns, and  consequently,  to  my  mind,  they  must  be  al- 
lowed to  make  a very  large  margin  over  what  they  under- 
take to  pay  in  the  way  of  interest.  That  margin  is  usu- 
ally placed  by  investors  at  a minimum  of  twice  the 
interest  charges. 

If  a concern  does  not  show  earnings  for  the  past  num- 
ber of  years,  three,  four  or  five  years  at  least,  of  twice 
the  interest  charges,  the  security  will  be  very  hard  to 
sell.  That  margin,  of  course,  is  looked  to  by  the  investor 
as  a margin  of  safety.  For  example,  if  an  industrial 
company  were  offered. today — were  to  offer  today  or  a 
'public  utility  were  to  offer  today  first  mortgage  bonds 
secured  by  all  the  properties,  and  the  property  was  worth 
twice  as  much  as  the  issue  of  the  bonds,  so  that  you  are 
only  issuing  bonds  to  fifty  per  cent  of  the  value,  all  that 
would  be  so  far  so  good,  but  if  the  earnings  for  the  past 
three,  four  or  five  years  showed  barely  the  seven  and  a 
half  per  cent,  or  whatever  it  was  they  had  to  pay,  there 
is  no  one  would  buy  the  securities  because  they  would 
say  there  is  no  margin  for  safety  for  me,  I want  to  invest 
in  this  other  concern  here  who  is  offering  its  securities  at 
an  equally  good  rate  which  shows  a margin  in  my  favor 
of  three  or  four  or  possibly  five  or  six  times  the  amount 
of  interest  charge. 

The  second  question  is  would  living  conditions  and  the 
general  business  situation  in  the  City  of  Chicago  be  af- 
fected by  the  inability  of  public  utilities  to  secure  capital 
for  extensions  and  betterments? 

Well,  of  course,  that  can  practically  answer  itself.  It 
certainly  would  affect  the  living  conditions,  if  there  was 
a break  down  in  public  utilities  such  as  the  Street  Rail- 
way Company,  we  all  know  that  that  would  have  a very 


W2 


great  effect  on  the  living  conditions  of  the  people  and  on 
the  business  situation. 

In  a big  city  like  this  most  of  our  help  live  three  or 
four  or  five  or  six  or  eight  or  ten  miles  from  our  offices 
or  our  places  of  business. 

I think  that  question  really  is  self  evident. 

Commissioner  Shaw : Mr.  Forgan,  it  was  said  by  many 
that  the  carriers  are  not  in  as  good  a condition  as  they 
should  be  and  there  has  been  a breakdown.  Whatever 
condition  they  may  be  in,  taking  into  consideration  the 
condition  they  are  in,  is  it  affecting  the  business  interest 
of  the  country  today,  the  conditions  of  the  railroads  as 
they  are  now,  and  speaking  generally  now? 

Mr.  Forgan:  Yes,  sir.  I think  the  condition  of  the 
railroads  today  is  affecting  everything.  It  has  its  influ- 
ence on  financial  conditions  which  I have  described  at 
first. 

The  lack  of  prompt  transportation  causes  what  we 
bankers  call  frozen  credit.  A man  may  for  example  ship 
a carload  of  something.  Ordinarily  it  ought  to  get  to  its 
destination  perhaps  in  three  or  four  or  five  days.  He 
draws  a draft  at  sight  with  a bill  of  lading  for  the  goods 
and  the  bank  cashes  that  draft  and  sends  it  with  instruc- 
tions to  hold  the  draft  until  arrival  of  the  goods.  If  the 
goods  got  there  in  three  or  four  or  five  days  we  would 
have  returns  from  that  draft  in  another  day.  If,  how- 
ever, on  account  of  the  transportation,  breakdown  in  fa- 
cilities, that  car  is  held  up  somewhere,  lying  around  some- 
where, and  it  has  not  reached  the  payee  of  the  draft  for 
three  weeks,  then  our  money  would  be — while  he  had  ex- 
pected it  to  be  tied  up  for  three  or  four  or  five  days,  it  is 
tied  up  for  three  weeks,  and  that  is  the  situatiou  today. 


103 


In  Chicago  we  do  a large  business  with  what  we  call 
country  banks.  That  means  other  banks  in  every  size  of 
town,  big  or  little,  all  over  the  west,  northwest  and  south- 
west and  the  commonest  thing  today  is  to  receive  a letter 
from  a bank  in  one  of  these  towns  to  the  effect  on  account 
of  the  lack  of  cars  or  strike  or  the  lack  of  transportation, 
for  some  reason  or  other  shippers  cannot  ship  live  stock 
or  grain  or  something  else  they  want  to  ship  and  there- 
fore they  need  an  accommodation  to  tide  them  over  so 
they  borrow  from  the  city  banks  and  we  borrow  from  the 
Federal  Eeserve  Bank.  That  is  what  is  causing  the 
acuteness  of  the  strain  today,  but  of  course  general  con- 
ditions have  existed  for  a long  time  very  largely  on  ac- 
count of  the  fact  that  the  Government  had  to  borrow 
about  twenty  billions  of  dollars  of  money  and  today  the 
Federal  Reserve  Bank  is  carrying  a whole  lot  of  that 
liberty  loan  yet.  It  has  not  been  absorbed  or  paid  up  for 
by  the  investor. 

Chairman  Wilkerson:  Speaking  of  the  railroad  situ- 
ation, it  is  your  opinion,  I assume,  looking  backward, 
the  country  would  have  been  vastly  better  off  if  the  read- 
justment of  rates  would  have  come  in  time  to  have  pre- 
vented the  breakdown  which  we  are  now  suffering. 

Mr.  Forgan:  Yes. 

Chairman  Wilkerson : That  is  looking  backwards  and 
having  the  benefit  of  the  experience. 

Mr.  Forgan:  Yes,  sir. 

Chairman  Wilkerson:  And  also  assume  it  is  your 
opinion  we  should  profit  from  that  lesson  in  dealing  with 
the  present  situation. 

Mr.  Forgan : It  is  my  hope.  I am  beginning  to  doubt 
whether  we  ever  profit  by  anything  in  this  country,  but  I 
still  hope. 


104 


I would  like  to  say  a word,  if  you  will  allow  me,  sir, 
in  answer  to  the  question  you  put  to  my  previous  essay 
here. 

You  talked  about  depreciation  reserve  on  the  liability 
side.  Now,  in  the  case  of  the  Telephone  Company,  as  I 
understand  it,  that  depreciation  reserve  is  put  there  in  ac- 
cordance with  orders  of  the  Interstate  Commerce  Com- 
mission and  does  not  mean  that  there  is  a fund  invested 
in  property  but  simply  means  that  the  property  on  the 
other  side  of  the  balance  sheet  is  worth  that  much  less 
than  what  it  shows.  For  example,  if  you  have  a prop- 
erty at  fifty  millions  and  the  depreciation  of  it  is  five 
per  cent  a year,  you  may  write  down  that  depreciation 
by  writing  your  fifty  millions  down  to  forty-seven  mil- 
lion five  hundred  thousand.  Then  your  property  is  forty - 
seven  million,  five  hundred  thousand.  Or  you  may  put 
in  the  other  side  of  your  statement  depreciation  reserve 
of  two  million  five  hundred  thousand  dollars.  You  have 
not  got  two  million  five  hundred  thousand  more  property 
value.  You  have  simply  a reserve  for  depreciation. 
Your  property  on  this  side  is  worth  that  amount  less. 
You  could  have  depreciated  it  by  writing  it  down,  but 
instead  you  put  a credit  on  the  other  side  for  it.  That 
is,  as  I understand,  the  depreciation  reserve  of  a tele- 
phone company. 

Mr.  Ringer:  Is  that  testimony  or  merely  an  illustra- 
tion of  what  may  occur  in  the  bookkeeping?  It  is  not 
to  be  regarded  in  any  way  as  the  real  fact  in  reference 
to  the  Telephone  Company? 

Commissioner  Lucey:  You  can  take  that  up  on  cross- 
examination. 

Chairman  Wilkerson : That  is  all. 


105 


Charles  H.  Sohweppe,  a witness  herein,  having  been 

first  duly  sworn,  testified  as  follows : 

Mr.  Bangs : I suggest  you  give  your  present  position 
and  experience  before  you  start  in  to  answer  the  ques- 
tion. 

Mr.  Schweppe:  My  name  is  Charles  H.  Schweppe.  I 
am  a partner  of  Lee  Higginson  & Company,  investment 
bankers.  I have  been  in  this  business  between  15  and  20 
years. 

In  answer  to  the  first  question  what  is  the  situation 
with  reference  to  the  demand  for  capital  by  industrial 
concerns  and  public  utility  concerns.  I think  since  Feb- 
ruary 1 — Mr.  Corey  said  since  March  22 — , about  roundly 
two  hundred  and  fifty  million  dollars  worth  of  securities 
has  been  brought  out,  mainly  bonds  and  notes.  I think 
since  February  1 probably  four  hundred  and  fifty  mil- 
lion worth  of  bonds  and  notes  of  industrial  and  public 
utility  companies,  and  possibly  one  or  two  foreign  issues 
have  been  brought  out.  I added  up  a list  hurriedly  be- 
fore I left  my  office.  Most  of  those  issues  have  been  sold 
by  the  original  houses  of  issue,  but  I think  a great  many 
of  them  are  yet  to  reach  the  ultimate  consumer. 

The  rates  of  interest  have  been  very  high.  Just  re- 
cently a concern  which  I have  regarded  for  ten  years  as 
one  of  the  prime  public  utility  concerns  in  the  country, 
the  Pacific  Gas  & Electric  Company  of  San  Francisco, 
has  sold  five  year  notes,  and  they  are  almost  on  a seven 
and  three-quarter  per  cent  basis,  to  the  ultimate  investor, 
and  without  knowing  exactly  I imagine  the  money  must 
have  cost  between  nine  and  nine  and  a quarter  per  cent. 
1 regard  the  Pacific  Gas  & Electric  Company  as  a very 


106 


good  illustration  of  what  it  costs  very  good  public  utility 
companies  today  to  get  new  capital  interested  in  their 
business. 

What  are  the  present  interest  rates  for  permanent 
financing  and  what  rate  of  return  must  public  utility 
properties  earn  in  order  to  attract  new  capital. 

I have  here  a list  of  the  local  public  utility  companies. 

The  Surface  Lines  net  from  12.10  to  12.95,  the  out- 
standing bonds,  first  mortgage  bonds. 

The  Commonwealth  Edison  Company,  first  mortgage 
bonds,  which  I consider  one  of  the  premier  public  utility 
securities  of  the  country  is  on  a 6.8  per  cent  basis. 

The  Northwestern  Elevated  is  on  a 8.8  basis. 

The  Peoples  Gas  Light  & Coke  Company  long  term 
bonds  are  on  a 8.9  basis. 

The  Public  Service  Company  of  Northern  Illinois  is 
on  a 7.45  basis. 

The  Chicago  Telephone  Company,  in  the  last  report 
that  I have  seen  earned  a little  over  four  times  all  its 
interest  charges  on  its  funded  debt. 

The  Commonwealth  Edison  Company  earned  about  3^ 
times  its  interest  charges. 

The  Peoples  Gas  Light  & Coke  Company  just  got 
across  the  line,  1.03  times,  just  barely  earned  its  inter- 
est charges. 

The  Northwestern  Elevated  almost  11  times  the  in- 
terest charges. 

The  Chicago  Eailways  Company  also  just  got  across 
the  line,  1.04  times. 

The  Chicago  City  Railway  Company  almost  If  times. 

The  ultimate  investor  I think  wants  public  utility  se- 


107 


nior  securities,  the  company  issuing  first  mortgage  or 
first  and  refunding  bonds  to  earn  about  twice  the  inter- 
est charges.  I think  when  the  bond  men  consider  a new 
issue  of  the  company  where  the  earnings  are  less  than 
one  and  three-quarters  times  interest  charges  they  shake 
their  heads  in  a negative  way.  We  do  not  want  them. 

I think  the  Peoples  Gas  Light  & Coke  Company  and 
possibly  the  Northwestern  Elevated  Company  and  I am 
sure  the  Chicago  Railways  Company  and  Chicago  City 
Railways  Company,  on  account  of  their  showing  as  to 
net  earnings  in  relation  to  interest  charges  on  the  funded 
debt,  would  have  a good  deal  of  difficulty  today  financing 
in  Chicago  on  any  basis  where  investment  bankers  are 
situated.  ‘ 

Chairman  Wilkerson : Would  it  be  much  easier  for  the 
Chicago  Telephone  Company! 

Mr.  Schweppe:  Yes,  sir.  I think  so.  Recently  the 
Chicago  Telephone  Company  asked  a group  of  banks  and 
one  or  two  bond  houses  to  figure  on  ten  million  dollars 
of  notes  falling  due  December  1,  1923,  as  you  may  know, 
and  they  did  not  accept  the  proposition.  When  it  was 
mentioned  to  me  I was  sorry  that  we  were  asked  to  do 
it  just  at  the  time  it  was,  about  five  weeks  ago,  because 
we  have  been  connected  with  the  Chicago  Telephone 
Company  financing  since  1908  when  they  first  made  this 
first  mortgage  bond  issue,  and  at  that  time  there  was  a 
sort  of  joy  to  our  business  here  to  have  an  opportunity 
when  we  were  awarded  that  first  issue  of  five  million 
dollars  with  the  Merchants  Loan  & Trust  Company  and 
First  Trust  & Savings  Bank.  We  regarded  it  as  very 
prime  business.  Had  we  been  awarded  these  ten  million 
dollars,  and  they  would  have  been  a high  rate  of  inter- 
est, seven  per  cent  bonds,  we  would  have  had  a great  deal 


108 


of  difficulty  to  have  sold  them,  I think,  just  because  I 
feel  public  utility  issues  are  not  popular  today. 

Chairman  Wilkerson:  The  difference  you  mean  be- 
tween the  utilities  such  as  the  Telephone  Company  with 
its  high  earning  and  the  other  one,  that  it  is  just  getting 
by  on  bond  interest  is  that  the  Telephone  Company  would 
have  no  difficuly  in  getting  the  money. 

Mr.  Schweppe : That  is  right. 

Chairman  Wilkerson:  And  the  other  company  could 
not  get  the  money? 

Mr.  Schweppe : I think  the  Chicago  Telephone  Com- 
pany could  have  got  the  money  but  the  cost  of  the  money 
was  pretty  high.  From  the  point  of  view  of  reaching 
the  ultimate  investor  it  would  have  been  difficult  in  the 
locality  from  Buffalo  east  to  New  England,  where  origi- 
nally a good  many  of  the  Telephone  Company  bonds 
were  placed;  it  is  my  opinion  it  would  have  been  very 
difficult  for  my  firm  to  have  done  a great  deal  of  business 
in  there,  so  we  would  have  to  depend  largely  on  the  in- 
vesting public  in  the  central  west. 

As  to  question  No.  2,  what  rate  of  return  must  public 
utility  properties  earn  in  order  to  attract  new  capital. 

I tried  to  embrace  that  in  what  I said.  No.  2,  I have 
not  anything  to  add  to  what  my  predecessors  have  said. 
I think  it  more  or  less  answers  itself. 

It  is  my  opinion  living  conditions  and  the  general  busi- 
ness situation  in  our  city  would  be  very  materially  af- 
fected if  the  public  utility  companies  do  not  keep  abreast 
of  the  time. 

Commissioner  Shaw:  As  I understand  you,  Mr. 
Schweppe,  as  a general  proposition  the  yard  stick  that 
the  investment  banker  applies  when  application  is  made 


109 


for  the  purpose  of  the  sale  of  securities,  is  that  the  net 
exceeds  the  interest  charges. 

Mr.  Schweppe:  May  I ask  if  you  mean  the  invest- 
ment banker  or  investor. 

Commissioner  Shaw : The  investor. 

Mr.  Schweppe : Yes. 

Commissioner  Shaw:  That  is,  in  other  words,  he  is 
not  materially  concerned  in  what  the  valuation  might  be 
or  what  the  rate  of  return  might  be,  but  what  actually 
happened. 

Mr.  Schweppe : Oh,  yes,  it  is  my  opinion  that  he  ex- 
pects a reasonable  margin  of  safety  on  valuations.  He 
has  not  got  so  used  to  seeking  a sinking  fund  in  a public 
utility  bond,  and  I think  that  is  one  reason  why  some  of 
our  great  institutions  and  large  trusteeships  have  not 
bought  public  utility  bonds  of  late.  I do  not  know  the 
ratio,  but  in  looking  over  the  investments  of  five  of  the 
larger  insurance  companies  I recall  that  their  public  util- 
ity purchases  have  not  been  large  in  the  last  four  or  five 
years,  and  I think  one  of  the  reasons  why  they  have 
bought  is  very  few  public  utility  issues  have  had  a sink- 
ing fund.  It  is  a continuous  promise  to  pay.  They  ex- 
pect those  issues  will  be  refunded,  and  while  the  invest- 
ment banker  that  deals  with  that  company  may  furnish 
the  money,  yet  that  company  is  known  to  be  in  the  market 
almost  continually,  and  is  with  the  Commercial  Bank, 
if  a concern  keeps  on  loaning  one  hundred  thousand  dol- 
lars a year,  year  in  and  year  out,  that  bank  is  going  to  try 
to  get  the  money,  if  its  management  don ’t  get  it,  their  board 
of  directors  if  it  is  on  the  job,  will  say  to  the  president 
of  the  bank,  or  the  cashier,  better  get  the  loan  reduced, 
or  if  possible  paid  off  in  time,  and  I assume  most  boards 
of  directors  of  Chicago  banks  would  be  glad  to  have  that 


110 


fellow  go  somewhere  else  to  do  business.  They  do  not 
want  his  loan  year  in  and  year  out  because  it  is  not  good 
commercial  business  and  it  is  not  good  banking. 

Commissioner  Lucey:  In  your  opinion  there  is  in  the 
minds  of  the  investing  public  a prejudice  against  public 
utilities  ? 

Mr.  Schweppe : Yes,  sir. 

Commissioner  Lucey : That  applies  to  all  utilities,  the 
good  as  well  as  bad? 

Mr.  Schweppe:  Yes,  sir. 

Commissioner  Lucey : I mean  as  to  their  financial  con- 
ditions when  I use  that  term? 

Mr.  Schweppe : Yes,  sir.  I think  a good  public  utility 
bond  can  be  rigged  with  the  proper  revisions,  current 
rate  of  interest,  and  while  a bond  trust  deed  running  five 
or  ten  years  can  be  placed  today,  and  I think  that  one  job 
that  good  investment  houses  have  before  them  is  it  pos- 
sible to  bring  back  these  customers  who  used  to  be  in 
the  bonds  five  or  ten  years  ago. 

Commissioner  Lucey:  There  is  no  question  but  what 
they  can  be  placed,  because  many  of  them  are  in  the  mar- 
ket, notably  the  one  you  referred  to  a while  ago  to  net 
7.70,  the  Pacific  Gas  & Electric  Company. 

Mr.  Schweppe:  Yes,  I was  in  the  conference  in  con- 
nection with  that  concern,  and  a large  number  of  those 
bonds  will  probably  be  placed  within  the  State  of  Cali- 
fornia, because  they  are  legal  for  California  Savings 
Banks.  The  house  which  is  first  attached  to  that  thought 
they  could  place  one-half  or  three-quarters  of  the  bonds 
within  the  State  of  California,  showing  the  people  of  that 
state  thought  well  of  it. 

Commissioner  Lucey : This  utility  and  many  others  in 


Ill 


this  list  here  are  being  financed  in  competition  with  the 
industrials? 

Mr.  Schweppe:  Yes,  sir. 

Commissioner  Lucey:  Now,  evidently  that  prejudice 
that  you  speak  of  does  not  extend  to  these  institutions. 

Mr.  Schweppe : No,  but  on  the  other  hand  I think  the 
large  investment  banker  prefers  to  handle  a good  indus- 
trial issue  at  the  present  time  compared  with  the  good 
public  utility  issue. 

Commissioner  Lucey:  Is  your  answer  based  on  local 
conditions,  or  is  it  based  on  knowledge  of  conditions  in 
general? 

Mr.  Schweppe : I mean  from  the  Atlantic  to  the  Pa- 
cific, because  I have  just  recently  been  across  from  New 
York  to  San  Francisco,  and  talked  with  many  men  in 
many  places. 

Commissioner  Lucey:  It  is  not  localized? 

Mr.  Schweppe : No,  I meant  it  generally  speaking. 

Commissioner  Lucey:  That  is  all. 

Mr.  Bangs:  These  are  all  the  witnesses  who  were 
able  to  attend  today.  It  is  possible  when  the  hearing  is 
adjourned  there  will  be  some  other  witnesses  we  want 
to  testify.  Mr.  Reynolds  is  out  of  town. 

Chairman  Wilkerson : Any  other  witnesses  who  want 
to  testify  this  afternoon? 

It  was  indicated  by  some  of  the  counsel  this  morning 
they  might  desire  to  cross-examine  some  of  the  witnesses. 
If  you  indicate  that  to  Mr.  Bangs  we  will  arrange  to  have 
the  witnesses  present  at  the  next  hearing,  and  after  the 
testimony  of  the  witnesses  will  be  taken  we  will  be 
pleased  to  have  such  suggestions  and  observations  as  in- 


112 


terested  parties  may  desire  to  submit  to  the  Commission 
on  the  subject. 

Did  I understand  you  to  say,  Mr.  Richberg,  you  had 
some  testimony  to  offer  or  that  you  merely  desired  to  be 
heard  at  the  conclusion  of  the  evidence? 

Mr.  Richberg:  No,  I did  not  make  the  suggestion  I 
had  any  testimony  to  offer.  I merely  said  I had  a state- 
ment that  I desired  to  make  in  connection  with  that. 

Chairman  Wilkerson : Do  you  prefer  to  wait  until  the 
testimony  of  the  witnesses  is  completed? 

Mr.  Richberg:  I have  no  particular  desire,  as  far  as 
I am  concerned,  to  wait  for  the  cross-examination.  I have 
no  particular  cross-examination  in  mind  at  the  present 
time  of  these  witnesses. 

Chairman  Wilkerson:  Let  the  record  show  that  this 
hearing  is  adjourned  until  Wednesday  the  12th  of  May 
in  Chicago  at  10  o’clock  A.  M. 

At  that  time  you  may  offer  further  evidence  if  you 
desire,  or  if  any  other  parties  desire  to  present  evidence, 
an  opportunity  will  be  afforded  and  the  cross-examina- 
tion of  such  witnesses  as  you  may  indicate  to  counsel. 

Mr.  Cleveland:  We  want  to  cross-examine  them  all. 

Chairman  Wilkerson : All  right.  And  then  such  state- 
ments as  you  desire  to  make,  Mr.  Richberg,  and  other 
gentlemen. 

Whereupon  an  adjournment  was  taken  until  Wednes- 
day, May  12,  1920,  at  10  o’clock  A.  M. 


IIH 


Chicago,  Illinois,  May  12,  1920,  10  a.  m 

Parties  met  pursuant  to  adjournment. 

Present:  Same  a*s  before. 

(Colloquy  omitted.) 

Chairman  Wilkerson:  This  is  a continuation  of  the 
hearing  of  the  29th  of  April,  and  all  understandings  that 
we  had  relative  to  that  hearing  may  be  taken  as  applying 
to  the  continuation.  Proceed. 


James  B.  Fokgan,  having  been  duly  sworn,  was  examined 

in  chief  by  Mr.  Dunbaugh,  and  testilied  as  follows : 

Q.  Mr.  Forgan,  will  you  state  for  the  record  your 
name  and  official  position  with  the  bank  that  you  are  con- 
nected with,  and  then  proceed  to  answer  the  question  that 
was  put  to  the  bankers  at  the  last  hearing,  and  perhaps, 
for  the  record,  I might  read  that  question,  Mr.  Commis- 
sioner. 

Chairman  Wilkerson:  You  may  read  it. 

Mr.  Dunbaugh:  First.  What  is  the  situation  with 
reference  to  the  demand  for  capital  by  industTial  con- 
cerns and  public  utilities?  What  are  the  present  interest 
rates  for  permanent  financing  and  what  rate  of  return 
must  utility  properties  earn  to  attract  new  capital? 

Second.  Would  living  conditions  and  the  general  busi- 
ness situation  in  Chicago  be  affected  by  the  inability  of 
the  public  utilities  to  secure  capital  for  extensions  and 
betterments? 


114 


A.  My  name  is  James  B.  Forgan.  I am  at  present 
chairman  of  the  hoard  of  directors  of  the  First  National 
Bank  and  First  Trnst  & Savings  Bank,  Chicago. 

My  answer  to  these  questions  will  he  as  follows : 

The  demand  for  capital  by  both  industrial  concerns  and 
public  utilities  has  been  and  still  is  very  heavy.  The 
principal  reason  for  this  is  that  during  the  war  capital 
was  not  available  for  the  enlargement  of  utility  plants  or 
even  for  their  proper  maintenance  and  most  of  the  utility 
companies  are  behind  in  the  work  necessary  to  be  done  to 
extend  and  equip  their  plants  to  meet  the  increased  de- 
mands on  them  by  the  public  for  service.  The  same  con- 
dition prevails,  although  not  so  generally,  with  industrial 
concerns.  As  it  takes  fully  twice  as  much  money  or 
credit  now  to  do  the  same  volume  of  business  or  to  make 
the  same  extensions  or  improvements  as  it  did  before  the 
war,  it  is  just  about  twice  as  difficult  to  secure  money  or 
credit  now  as  it  was  then.  The  situation  for  the  public 
utilities,  even  the  best  of  them,  is  a desperate  one  and 
both  in  the  interest  of  their  security  holders  and  in  the 
interest  of  the  general  public,  they  need  all  the  help  you 
can  give  them. 

In  regard  to  the  present  interest  rates  for  permanent 
financing  of  such  concerns  as  are  in  a position  to  borrow 
at  all,  the  rate  required  by  the  investor  is  around  per 
cent.,  which  means  about  9 per  cent,  to  the  borrower. 

I think  utility  companies  would  require  a guaranteed 
earning  power  of  at  least  the  current  rates,  being  paid 
by  industrial  companies  on  preferred  stocks,  that  is  from 
7 to  per  cent.,  in  order  to  attract  new  capital.  Where 
they  can  get  such  a guaranty,  I donT  know,  unless  you, 
the  Public  Utilities  Commission,  can  arrange  it  for  them 
by  fixing  their  rates  for  service  sufficiently  high  to  ac 


115 


complish  it.  It  is  certain  that  without  some  such  foun- 
dation to  work  on  none  of  the  Chicago  Street  Railways, 
whose  first  mortgage  bonds  are  now  selling  at  ridicu- 
lously low  prices,  could  float  an  issue  of  bonds  at  any  rate 
of  interest ; not  to  mention  an  issue  of  stock. 

Then  in  answer  to  the  second  question : 

It  is  self-evident  and  goes  without  saying  that  living 
conditions  and  the  general  business  situation  of  Chicago 
would  be  seriously  affected  by  the  inability  of  the  public 
utilities  to  secure  capital  for  extensions  and  betterments 
and  thus  be  able  to  keep  pace  with  the  growth  of  the  city 
and  the  increase  of  its  business.  The  city  has  now  grown 
far  beyond  the  facilities  afforded  by  its  transportation 
utilities,  while  the  Telephone  Company  is  away  behind 
in  its  orders  for  telephones,  and  the  other  companies  are 
all  short  of  the  facilities  they  should  afford  their  patrons 
and  would  be  glad  to  afford,  as  soon  as  they  see  an  oppor- 
tunity of  financing  the  necessary  extensions,  equipments 
and  improvements. 

That  is  all  I have. 

Mr.  Cleveland:  We  desire  to  cross-examine  Mr.  For- 
gan. 

Chairman  Wilkerson : The  same  understanding. 

Mr.  Cleveland : I am  willing  to  do  it  now  if  it  is  de- 
sired, or  later. 

Chairman  Wilkerson:  Do  you  prefer  to  have  Mr. 
Cleveland  ask  you  questions  now? 

A.  I have  no  objection,  and  I have  to  be  in  Washing- 
ton next  week  at  a bankers’  meeting,  and  I will  be  away 
all  next  week. 

Chairman  Wilkerson:  If  there  is  no  objection,  you 
may  proceed  and  ask  him  what  questions  you  wish. 


116 


Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Forgan,  you  have  been  in  the  banking  busi- 
ness for  a great  many  years,  have  you  not?  A.  Yes 
sir,  half  a century. 

Q.  In  the  matter  of  making  loans  what  are  the  matters 
of  prime  necessity?  A.  Well  the  first  would  be  that  the 
borrower  should  have  sufficient  assets  over  and  above 
his  liabilities  to  warrant  your  lending  it  to  him,  and  his 
business  was  in  such  shape  to  show  that  the  earning  ca- 
pacity of  the  business  was  satisfactory  and  able  to  pay 
the  interest  on  the  loan,  and  the  loan  at  maturity. 

Q.  Is  it  or  not  a fact  that  the  safety  of  the  invest- 
ment itself  is  the  matter  of  prime  necessity?  A.  The 
safety  of  the  investment  itself  would  be  the  first  con- 
sideration, yes. 

Q.  It  would  make  no  difference  how  much  interest 
was  being  paid  unless  there  is  security  for  the  principal? 
A.  Not  unless  you  get  hold  of  one  of  those  fellows  that 
says  there  is  a sucker  born  every  hour,  and  says  there 
is  a possibility  of  selling  everything  you  print. 

Q.  You  have  known  in  times  past  here  of  a certain 
gentleman  who  conducted  one  bank  anyhow,  who  said 
if  he  could  get  three  or  four  installments  of  interest,  the 
principal  became  a matter  of  secondary  consideration, 
but  that  would  not  be  sound  investment?  A.  No.  I have 
heard  of  bankers  who  said  they  did  not  give  a damn  for 
the  principal  if  they  could  collect  interest. 

Q.  That  would  be  absolutely  unsound,  wouldn’t  it? 
A.  That  would  be  unsound,  yes. 

Q.  Is  it  or  not  true  that  from  the  standpoint  of  an 
investment  for  capital  or  of  making  a loan,  that  the  title 


117 


to  the  security  is  a matter  also  of  • prime  importance  ? 
A.  Yes.  In  the  matter  of  loans,  such  as  we  are  talking 
about  here,  of  course,  attorneys  who  are  generally  spe- 
cialists in  that  line  of  business  are  employed  to  investi- 
gate all  of  the  legal  requirements. 

Q.  Now,  if  you  would  take  a case  where  the  cost  of 
the  property,  the  absolute  cost  of  the  property  is  ascer- 
tainable, and  it  appears  that  that  property  is  already 
mortgaged  for  substantially  all,  or  more  than  the  cost  of 
the  property,  there  would  not  be  any  hope  of  getting  any 
further  loans  on  that  property,  would  there,  unless  there 
was  new  capital  put  in  ? A.  I would  think  not. 

Q.  And  there  would  be  no  chance  of  inducing  new  cap- 
ital to  be  invested  under  those  conditions,  would  there! 
A.  Well,  of  course,  unless  you  could  show  that  condi- 
tions were  going  to  be  established  under  which  the  new 
capital  put  in  would  get  some  such  guaranty  as  I have 
suggested  in  my  remarks,  or  get  some  guaranty  that  the 
interest  would  be  paid  or  the  dividends  would  be  paid. 

Q.  The  mere  guaranty  of  interest  would  not  help 
any,  would  it,  unless  the  principal  was  secured!  A. 
Well,  the  principal  would  have  to  be  secured  too,  yes. 

Q.  Now  you  spoke  of  the  telephone  company  and  the 
elevated  and  the  surface  lines.  As  I understood  you  to 
say  the  city  has  outgrown  their  present  equipment,  that 
is  true,  isn’t  it!  A.  Oh,  yes. 

Q.  And  they  liave  not  adequate  equipment  to  give  the 
public  the  service  they  are  entitled  to,  that  is  right,  isn’t 
it!  A.  They  have  to  have  equipments  and  extensions. 

Q.  I mean  as  it  stands  now,  the  equipment  is  inade- 
quate? A.  Yes. 

Q.  And  they  need  and  must  have  new  capital  to  make 


118 


the  necessary  extensions'?  A.  That  is  what  I believe, 
yes. 

Q.  And  to  get  the  equipment  that  is  necessary  to  re- 
move the  inadequacy,  that  is  true,  isn’t  it,  Mr.  Porgan? 
A.  Yes,  that  is  true. 

Q.  And  in  order  to  solve  the  problem  by  means  of 
rate  making,  it  would  be  necessary  that  the  rates  should 
be  sufficiently  high  to  provide  that  new  capital,  wouldn’t 
it,  or  induce  its  investment?  A.  Why,  yes,  they  would 
have  to  have  the  rates  sufficient  to  induce  the  capital  to 
come  in. 

Q.  Yes.  Now,  what  in  your  opinion  would  it  be  neces- 
sary to  do  in  the  way  of  rates  in  order  to  induce  the 
capital  to  come  in?  A.  In  connection  with  which  com- 
pany are  you  talking  about? 

Q.  Well,  the  surface  lines,  for  instance?  A.  Well, 
I don’t  know;  I would  not  undertake  to  pass  upon  that. 
I think  the  commission  have  been  on  that  for  months, 
and  I could  not  settle  that  in  a minute. 

Q.  The  money  market  conditions  are  not  peculiar  to 
Chicago,  are  they?  A.  No,  they  have  been  much  the 
same  all  over  the  country. 

Q.  All  over  the  world,  isn’t  it?  A.  Oh,  yes.  It  is 
worse  on  the  other  side,  across  the  Atlantic. 

Q.  It  is  a fact,  isn’t  it,  that  even  government  bonds 
drawing  four  and  one-quarter  per  cent  are  selling  for 
eighty-five  or  less?  A.  Somewhere  about  that. 

Q.  How  do  you  account  for  that,  Mr.  Forgan?  A. 
Well,  the  government  did  not  put  them  out — there  is  a 
pretty  long  story  on  that  if  you  get  me  on  that  subject. 
The  government  did  not  pay  enough  for  them  at  the  start. 
The  government  appealed  to  patriotism  in  order  to  sell 


119 


the  bonds,  and  response  came  from  the  patriotic  stand- 
point, and  the  people  that  bought  them  bought  them  with- 
out properly  anticipating  what  was  going  to  happen  in 
consequence  of  the  war  to  the  money  market,  and  in  the 
enthusiasm  at  the  time  they  took  the  bonds  and  took  them 
too  low.  That  is  all  there  is  to  that. 

Q.  Now,  isn’t  it  a fact  that  we  are  at  this  time  in  a 
period  of  very  gross  inflation  in  everything — in  your 
. opinion?  A.  No,  I would  not  say  there  was  gross  infla- 
tion. There  is  undue  extension  of  credit,  and  that  of 
course  is  produced  by  conditions  connected  with  the  war. 
There  is  a large  expansion  of  credit,  I would  say. 

Q.  Is  it  or  not  true  that  the  banks  of  Chicago — and 
for  that  matter,  all  over  the  country — have  adopted  a pol- 
icy of  curtailing  credit!  A.  They  have  adopted  a policy 
of  discriminating  as  to  the  kind  of  credit  they  will  give 
with  the  hopes  they  will  be  able  to  take  care  of  the  essen- 
tial credit  by  refusing  to  take  care  of  what  might  be  called 
the  non-essential  credit. 

Q.  You  spoke  of  the  rate  of  interest  being  7^  per  cent, 
to  the  borrower,  and  as  9 per  cent. — it  costs  the  borrower 
9 per  cent,  and  the  lender  gets  7-J  per  cent.,  is  that  right! 
A.  What  I said  about  that  was  that  certain  companies 
as  are  being  considered  here,  such  of  them  as  were  in  po^ 
sition  to  borrow  at  all — 

Q.  Yes.  A.  — ^would  have  to  give  the  borrower  about 
per  cent,  which  would  mean  they  would  have  to  pay 
about  9. 

Q.  Just  how  do  you  get  around  the  laws  of  the  state 
against  charging  usury  on  that  basis ! A.  If  my  lawyer 
is  right,  you  are  not  posted.  I understand  that  we  can 
charge  corporations  anything  we  have  a mind  to.  There 


120 


is  no  usury  law  in  connection  with  corporations.  That 
only  applies  to  individuals. 

Q.  That  is  the  theory  that  you  are  going  on?  A.  I 
suppose  it  is. 

Q.  At  any  rate,  you  are  going  on  the  theory  in  mak- 
ing your  statement  that  the  law  limiting  the  rate  of  inter- 
est by  contract  to  7 per  cent,  does  not  apply  to  corpora- 
tions? A.  Does  not  apply  to  corporations  or  to  securi- 
ties of  this  kind  which  are  bought  and  not  in  the  way  of 
just  a mere  loan  being  made.  I believe  there  is  something 
in  that,  but  I am  not  a lawyer,  and  I would  refer  that  to 
my  attorney. 

Q.  Do  you  directly  or  indirectly  hold  or  own  any  of 
the  securities  of  the  surface  lines  or  telephone  company 
or  elevated?  A.  Yes,  we  hold  some,  and  have  handled 
the  elevated ; we  have  handled  the  Chicago  City  Railway 
and  the  telephone  company,  these  three,  and  the  others 
we  have  not  handled. 

Q.  In  your  opinion,  at  the  present  time,  under  condi- 
tions as  they  stand  now,  is  it  possible  for  the  Chicago 
Surface  Lines  to  borrow  any  money?  A.  Not  in  their 
present  condition,  I think. 

Q.  Or  the  elevated?  A.  No. 

Q.  The  telephone  company  can  borrow  money  if  it 
pays  the  rate  of  interest?  A.  The  telephone  company 
recently  made  arrangements  to  which  we  were  parties  to 
lend  them  some  money. 

Q.  How  much,  Mr.  Forgan?  A.  I forget.  I think  it 
was  ten  millions  or  something,  I am  not  sure,  though;  I 
think  it  was  ten  millions.  I know  we  were  parties  to  a 
hona  fide  offer  I made  them. 

Q.  What  was  that  hona  fide  offer?  A.  I cannot  give 


121 


you  the  details  of  it  now.  It  cost  the  company  somewhere 
about  9 per  cent.,  or  it  would  have  if  they  would  have 
taken  it.  At  the  time  we  were  disappointed  we  did  not 
get  it;  now  we  are  glad  we  did  not. 

Q.  Mr.  Forgan,  when  you  spoke  of  these  companies 
needing  new  capital,  do  you  mean  new  capital  in  the  way 
of  further  loans  that  have  to  be  repaid  or  the  investment 
of  new  money  by  owners!  A.  Well,  I do  not  see  very 
well  how  they  are  going  to  get  owners  to  come  in  in  the 
surface  lines,  but  of  course  if  they  were  going  to  be  prop- 
erly financed  what  they  need  would  be  money  put  in  by 
the  owners. 

Q.  They  would  need  new  capital!  A.  They  would 
need  new  capital.  That  is  really  their  crying  need,  but 
take  the  Chicago  Railways  Company,  since  they  got  their 
ordinance  they  have  got  all  their  money  by  borrowing, 
as  far  as  I remember;  they  have  never  tried  to  issue  new 
capital,  and  I do  not  think  they  are  in  position  now  to 
do  it. 

Q.  Taking  a concern — You  are  familiar,  more  or 
less,  with  the  ordinances  of  1907,  are  you  not!  A.  Oh, 
yes.  Not  quite  fresh,  up  to  date. 

Q.  You  know  how  they  build  up  the  purchase  price 
there,  do  you  not,  Mr.  Forgan!  A.  I know  there  is  a 
purchase  price  which  the  city  would  have  to  pay  if  they 
took  over  the  road,  yes. 

Q.  If  it  would  appear  that  the  properties  were  mort- 
gaged for  all  or  substantially  the  full  amount  of  that  pur- 
chase price,  would  that  in  your  judgment  be  an  element 
to  be  taken  into  consideration  in  determining  whether  the 
companies  could  borrow  new  money  or  get  new  invest- 
ment! A.  That  is,  whether  the  purchase  price  was  a 


122 


fixed  value,  something  they  would  finally  get  for  the  prop- 
erties. 

Q.  Yes.  A.  Why,  certainly. 

Q.  The  point  is  whether,  if  the  companies  are  mort- 
gaged for  substantially  all  of  that  purchase  price,  this 
agreed  purchase  price,  representing  the  cost  of  the  prop- 
erty, would  that  be  an  element  that  would  be  important 
to  take  into  consideration  in  passing  on  their  ability  to 
get  new  money  by  loan  or  investment?  A.  Oh,  yes,  quite 
essential. 

Q.  And  would  the  fact  that  the  rights  of  the  company 
in  the  streets  will  expire  on  February  1,  1927, — would 
that  be  a matter  that  would  be  important  to  consider  in 
the  matter  of  making  a loan  to  the  company  or  procuring 
capital  to  go  into  the  company?  A.  Well,  these  are  the 
matters  that  have  been  considered  always  when  we  have 
made  loans  to  them  in  the  past,  and  we  also  believed  there 
was  a sufficient  margin  there  to  warrant  the  loans  up  to 
the  present  time. 

Q.  Yes.  Now,  would  it  be  a material  consideration 
that  their  rights  in  the  street  expire  on  February  1,  1927  ? 

Chairman  Wilkerson:  If  they  do. 

A.  If  they  do. 

Mr.  Cleveland:  If  they  do,  yes. 

A.  Yes,  that  would  have  to  be  a matter  that  would 
have  to  be  considered,  yes. 

Q.  You  made  some  general  statement  in  regard  to  the 
utility.  Do  you  discriminate  in  any  way  between  those 
utilities  who  have  got  quite  an  equity  in  their  assets  and 
those  which  have  none?  A.  Why,  certainly. 

Q.  Now,  is  the  condition  which  is  now  prevailing  due 
partially  to  a shortage  of  labor  and  high  price  of  labor? 


123 


A.  Oh,  that  is  one  element,  of  course  ; that  makes — ^ac- 
counts for  the  expansion  of  credit  that  I said  exists.  It 
requires  now  about  twice  as  much  money  to  do  the  same 
volume  of  business  that  it  did  when  labor  was  half  the 
price  and  material  was  half  the  price.  It  requires  twice 
as  much  credit,  and  that  is  the  reason  we  have  so  much 
credit. 

Q.  Now,  do  you  have  an  idea  about  whether  this  con- 
dition that  is  existing  will  continue,  or  whether  there  will 
be  a change,  and  if  so,  when?  A.  Well,  I am  like  every- 
body else.  I am  living  in  hopes  that  it  will  change,  but 
‘I  do  not  think  it  will  change  very  soon. 

Q.  About  when  do  you  think  there  will  be  a change? 
A.  Oh,  I could  not  say;  I could  not  say. 

Mr.  Cleveland:  I think  that  is  all. 

Chairman  Wilkerson:  Any  further  examination? 

Commissioner  Lucey:  As  I understood  your  state- 
ment, with  your  bank,  the  utility  or  the  company  or  the 
individual,  either  gets  credit  or  he  does  not.  The  rate  of 
interest  he  is  willing  to  pay  does  not  cut  much  figure  on 
that  proposition. 

A.  Not  in  regard  to  whether  he  gets  it  or  not.  It  does 
whether  he  gets  it  from  us  or  not.  We  want  our  own 
price.  We  enter  into  competition  in  the  matter  of  terms. 

Commissioner  Lucey : What  I am  trying  to  get  in  the 
record  here  is  the  statement  from  you  that  if  the  com- 
pany was  not  entitled  to  credit  the  rate  of  interest  which 
it  might  offer  would  not  cut  much  figure? 

A.  It  would  not  cut  any  figure  with  us  at  all. 

Q.  With  the  Chicago  Telephone  Company  which  has 
been  discussed  here  there  is  no  question  of  the  values  of 
the  securities  of  the  telephone  company  in  your  mind? 
A.  Not  up  to  the  present  time  there  is  not. 


124 


Commissioner  Lucey : No. 

A.  We  have  always  been  in  a position  to  handle  their 
securities  when  they  come  out  up  to  the  present  time,  and 
have  always  taken  an  interest  in  them  and  always  bid  on 
them.  Of  course,  that  is  a very  good  illustration  as  to  the 
ditference  between  them  and  other  companies.  Take  the 
Chicago  Railway  Company,  whose  bonds  we  have  largely 
handled,  a case  like  that,  there  a very  strong  prejudice 
exists,  and  it  reflects  on  utility  companies,  it  reflects  on 
the  telephone  company  and  all  the  rest  of  the  utility  com- 
panies just  in  this  way:  Say  a servant  girl  comes  in  to 
our  counter,  and  did  come  in,  and  bought  a thousand  dol- 
lar bond  of  the  Chicago  City  Railway  Company.  We 
told  her  it  was  a first  mortgage  bond,  the  property  was 
good,  a good  margin  there  when  we  sold  it,  and  we 
charged  her  pretty  nearly  par  for  it,  around  par.  She 
carries  it  along  for  a few  years,  and  she  comes  in  to  us, 
and  she  says  she  has  to  get  two  or  three  hundred  dollars 
of  that  money,  of  that  thousand  dollars  she  has  got  there, 
and  she  produces  her  bond  and  she  wants  to  sell  it  back 
to  us.  We  are  put  in  the  position  of  having  to  tell  her  we 
can  only  give  her  65  cents  to  the  dollar  for  her  money, 
and  she  is  very  much  disappointed  and  it  is  pretty  hard  to 
explain  to  her  what  the  trouble  is.  Now,  the  men  at  our 
counter  are  going  to  defend  themselves  the  best  they  can, 
they  are  going  to  put  the  whole  of  the  weight  and  the 
burden  of  the  blame  right  on  the  street  railroad  company. 
They  are  not  going  to  take  any  more  of  the  blame  than 
they  can  help,  so  they  pump  that  girl  full  of  information 
about  the  condition  that  exists  in  connection  with  the 
street  railroads  and  the  high  cost  of  everything  has  in- 
creased their  expenses,  and  they  are  not  getting  income 
enough.  She  goes  away  with  a sort  of  vague  idea  of  what 
they  try  to  explain  to  her;  but  she  tells  everybody  she 


125 


comes  in  contact  with  she  is  through,  she  is  not  going  to 
huy  any  more  bonds  at  the  First  Trust  & Savings  Bank; 
that  she  took  it  back  and  all  she  can  get  is  65  cents  on  the 
dollar,  and  that  spreads  like  wildfire,  and  it  hurts  us  and 
the  community  and  everybody. 

Another  man  would  come  in,  perhaps  a business  man, 
and  bought  ten,  fifteen  or  twenty  thousand  dollars,  the 
same  way,  and  he  comes  back,  he  watches  the  quotations 
and  knows  where  his  property  is  going,  and  he  under- 
stands the  situation,  but  he  makes  up  his  mind  at  that 
time  he  is  not  going  to  invest  in  public  utilities,  and  he 
goes  off  and  the  thing  spreads. 

That  is  the  way  the  thing  goes  until  the  dealer  in  utility 
bonds  has  the  greatest  difficulty  in  the  world,  unless  he 
can  show  a very  strong  situation  in  selling  a utility  bond 
at  all. 

Now,  I am  not  giving  you  imaginary  cases. 

That  happened  to  one  of  my  own  servant  girls,  that  I 
am  talking  about  now;  but  this  is  only  one  of  the  thou- 
sands that  I encounter  all  tlie  time,  and  the  thing  is  going 
on  perpetually  across  the  counter,  we  defending  our- 
selves as  having  sold  a good  bond  when  we  sold  it,  but 
conditions  are  now  so  it  is  only  worth  65  cents  on  the 
dollar. 

Commissioner  Lucey:  That  is  true,  even  though  the 
value  of  the  security  is  unquestioned,  in  your  mind,  like 
the  Chicago  Telephone  Company! 

A.  Anybody  that  has  got  stung  once  won’t  come  back 
and  take  a bond  from  you. 

Commissioner  Lucey : The  rate  of  interest  which  you 
and  your  associates  ask  the  company,  telephone  com- 
pany, and  which  it  thought  it  could  not  afford  to  pay  or 


126 


did  not  wish  to  pay — anyway  it  did  not  pay — was  not 
prompted,  I imagine,  by  any  idea  that  there  might  have 
been  in  your  minds  or  in  the  minds  of  your  associates  as 
to  the  lack  of  security  back  of  what  was  tendered? 

A.  No. 

Commissioner  Lucey:  But  was  on  account  of  the  in- 
dustrial rate  which  has  raised  all  rates  of  interest  and 
which  you  felt  they  would  have  to  pay  in  order  to  compete 
with  the  industrial? 

A.  Yes. 

In  regard  to  that  matter,  I know  the  matter  came  be- 
fore me  once  or  twice,  and  Mr.  Trailer,  who  was  negotiat- 
ing, said,  am  going  over  to  see  Mr.  Sunny,  I think 
we  can  land  that.  ’ ’ ‘ ‘ He  is  beating  us  down.  ’ ’ The  worst 
of  the  people  is  our  own  directors,  they  will  never  pay  as 
much  as  anybody  else.  He  was  going  after  it  to  get  all 
he  could,  and  I know  he  made  some  concessions.  Finally, 
when  Mr.  Sunny  got  us  where  he  could  not  get  us  any 
lower  he  declined  altogether. 

Commissioner  Lucey:  He  evidently  got  it  down  as 
much  as  he  wanted  to? 

A.  No;  he  did  not  as  much  as  he  wanted  to.  I men- 
tion that  just  to  show  the  way  things  go. 

Commissioner  Lucey:  Now,  referring  to  the  securi- 
ties of  the  underlying  companies,  of  what  you  and  we 
call  the  surface  lines,  are  you  familiar  with  the  valuation 
of  that  plant,  have  you  in  your  mind  a valuation  of  those 
surface  lines? 

A.  I have  nothing  in  my  mind  at  all  about  anything 
outside  of  the  Chicago  City  Railway,  with  which  I have 
been  more  or  less  connected  during  all  my  banking 
career  in  Chicago. 


127 


Q.  Roughly,  for  the  illustration,  the  purchase  price 
was  approximately  $55,000,000,  and  they  have  issued 
since  that  time  in  the  neighborhood  of  $100,000,000,  a lit- 
tle more  than  that,  I guess,  Mr.  Blair,  one  hundred  and 
ten? 

Mr.  Blair : About  $158,000,000. 

Mr.  Cleveland:  That  includes  the  fifty-five. 

Commissioner  Lucey:  The  fifty-five  million  dollar 
bonds  and  bonds  that  have  been  issued  now  amount  to 
about  $158,000,000. 

At  the  time  your  bank  and  your  associates  took  those 
bonds  which  were  issued  since  the  ordinance  of  1907,  and 
which  since  the  creation  of  this  commission  have  come, 
of  course,  before  this  commission,  and  all  the  time  subse- 
quent to  1907  all  those  bonds  were  issued  for  betterment 
to  the  plants  and  not  to  pay  operating  expenses,  and  were 
issued  as  a result  of  orders  made  by  the  Board  of  Super- 
vising Engineers  created  .under  these  ordinances,  and 
the  expenditures  which  are  covered  by  those  bonds  were 
virtually  approved  by  the  city  through  its  Board  of  Su- 
pervising Engineers, — I will  ask  you  if  at  the  time  those 
bonds  were  taken  by  you  you  had  any  question  in  your 
mind  as  to  the  value  of  the  underlying  securities? 

A.  We  had  not  any,  or  we  would  not  have  undertaken 
it. 

Commissioner  Lucey:  And  as  a matter  of  fact,  look-^ 
ing  at  it  now,  as  to  the  value,  do  you  have  in  your  mind, 
as  a business  man  of  Chicago  and  a man  who  is  in  the 
habit  of  passing  on  the  value  of  securities, — if  there  is 
any  question  in  your  mind  that  those  bonds  now,  as  a 
matter  of  fact  should  be  worth  the  par  value  thereof, 
instead  of  the  value  between  sixty  and  sixty-five  at  which 
they  are  selling? 


128 


A.  In  my  remarks  I referred  to  the  value  as  being 
ridiculously  low,  and  when  I said  ridiculously,  I meant  it. 
I think  the  value  should  he  there.  Of  course,  all  the  re- 
cent improvements  and  whatever  they  have  been  able  to 
do  on  these  properties  has  been  done  at  the  increased 
cost  of  labor  and  the  increased  cost  of  material,  and 
everything,  so  that  all  of  the  improvements  they  have 
been  able  to  put  on  it  must  have  gone  in  under  present 
conditions,  and  the  property  should  therefore  be  valued 
at  what  it  would  be  reproduced  for. 

Q.  Well,  what  I have  in  mind  is  that  the  value  of  these 
bonds  which  you  and  others  took  represented  additions 
and  betterments  and  extensions  of  the  property?  A.  Of 
the  property,  yes,  sir. 

Q.  And  in  the  banking  sense,  that  is  value  which  goes 
back  into  the  property?  A.  Yes. 

Q.  And  makes  the  property  worth  that  much  more? 
A.  Yes. 

Q.  As  a matter  of  fact,  notwithstanding  what  the  sur- 
face lines  securities  are  being  offered  in  the  market  today 
for, — or  any  other  utility  that  you  have  in  mind  that 
is  a good  utility,  there  is  no  question  in  your  mind  as 
a banker  that  the  bonds — that  the  absolute  value  is  in 
these  securities  notwithstanding  the  prejudice  on  the 
part  of  the  public,  that  the  dollars  or  value  are  there,  as 
a matter  of  fact?  A.  Yes,  if  they  were  allowed  to  use 
them  on  fair  returns. 

Q.  Is  it  your  thought  that  the  situation  as  to  the  sur- 
face lines,  as  a result  of  the  conditions  that  have  existed 
here,  stated  candidly,  where  it  has  been  obliged  to  come  to 
the  commission  for  authority  to  increase  its  rates  to  meet 
the  present  high  cost  of  everything,  and  the  fact  that  the 
City  of  Chicago  is  opposed  to  that,  and  has  been  bontest- 


129 


ing-  it,  and  making  diverse  and  various  claims  relative 
to  it,  has  that  in  any  sense  affected  the  Chicago  Surface 
Lines  to  a greater  extent  than  for  instance  it  has  affected 
other  utilities,  which  have  not  been  placed  in  that  posi- 
tion? A.  I think  there  is  no  doubt  about  that.  Decid- 
edly it  has  had  that  effect. 

Q.  These  securities  which  are  being  offered  on  the 
market  and  which  are  now  at  a low  rate, — and  I only  use 
the  surface  lines  as  an  indication  because  they  are  at  an 
exceptionally  low  rate,  in  common  with  nearly  all  other 
utilities, — have  you  any  opinion  as  to  what  makes  the 
utility  bonds  and  utility  securities  under  government 
regulation,  whether  it  is  national  or  state,  apparently  less 
desirable  and  less  taken  by  the  public  than  the  industrial 
bonds  and  securities  which  are  not  under  public  regula- 
tion and  are  subject  only  to  the  regulation  of  those  who 
control  the  institution?  A.  Well,  yes,  there  is  a doubt  in 
the  public  mind,  I think,  as  to  whether  such  utility  compa- 
nies as  you  refer  to,  will  get  such  treatment  as  will  enable 
them  to  get  revenue  enough  to  meet  the  increase  of  ex- 
pense. There  is  a doubt  in  my  mind  about  it.  I hope 
the  doubt  is  wrong. 

Q.  Well,  stating  it  candidly,  the  public  think  the  Utili- 
ties Commission  will  hold  them  down  too  close  on  valua- 
tions? A.  Yes,  sir. 

Q.  Or  rates  of  return?  A.  Yes,  sir. 

Q.  And  therefore,  being  under  public  regulation,  they 
are  afraid  to  take  these  securities?  A.  Yes,  sir. 

Q.  That  is  what  you  have  in  your  mind  as  a matter 
of  fact?  A.  Yes;  afraid  to  take  the  chances.  The  nat- 
ural thing  expected  of  the  commission  is  to  take  care  of 
the  great  mass  of  the  people  in  regard  to  what  fares  they 
are  going  to  pay,  rather  than  to  take  care  of  the  utility 


130 


companies  and  their  security  holders.  That  is  what  I 
mean  is  in  the  atmosphere.  Thai  is  the  idea. 

Q.  Mr.  Forgan,  as  I understood  you,  it  is  your  judg- 
ment that  the  value  back  of,  say  the  Chicago  City  Rail- 
way, is  probably  just  as  much  today  when  the  bonds  are 
sixty  or  sixty-five,  as  when  they  were  one  hundred  or 
more!  A.  From  the  standpoint  of  valuation  of  property 
that  exists  today,  yes. 

Q.  What  would  be  your  judgment  as  to  the  bearing 
of  this  fact,  that  on  the  market  they  are  worth  sixty  to 
sixty-five  and  due  to  the  greater  demand  for  money  than 
there  is  of  supply,  that  the  investor  might  refrain  from 
investing  in  a utility  bond  when  he  could  invest  in  a mu- 
nicipal bond,  which  would  be  tax  exempt,  under  the  in- 
come tax  law.  A wealthy  man  would  hesitate,  I should 
think,  to  invest  in  a public  utility  bond,  the  income  of 
which  would  come  under  the  application  of  the  income 
tax!  A.  Yes. 

Q.  Particularly  if  he  gets  into  the  higher  sur-taxes! 

A.  Yes. 

Q.  Whereas,  on  the  other  hand,  he  could  invest  in  a . 
municipal  bond,  which,  as  I understand,  is  exempt,  nat- 
urally the  investor  would  look  to  the  municipal  bond. 
Now,  if  you  could  explain  to  us, — assuming  that  we  agree 
on  that  proposition,  why,  then,  he  comes  into  the  indus- 
trial field, — ^it  would  clear  up,  in  my  mind  at  least,  some- 
thing that  I don’t  understand.  A.  Well,  of  course,  it  de- 
pends on  who  is  investing.  I do  not  think  there  is  any 
doubt  that  men  of  large  incomes  have  been  considering 
that  very  seriously.  Now,  not  only  that,  but  they  have  been 
selling  out,  and  that  has  had  a very  material  effect  on  the 
market,  they  have  been  selling  out  their  holdings  in  in- 
dustrial and  utility  bonds  for  two  reasons — from  the 


131 


standpoint  of  the  income  tax,  the  one  is  they  can  deduct 
their  losses  on  the  sale  from  their  income  and  the  other 
is  that  when  they  have  done  so  and  put  part  of  the  loss 
over  on  the  government,  they  can  then  buy  tax  exempt 
bonds,  and  we  run  across  that  all  the  time  in  large 
amounts,  but  it  is  not  all  the  large  income  people  that  in- 
vest in  these  bonds. 

The  illustration  that  I gave  you  of  the  servant  girl  is 
perhaps  among  the  smaller,  but  there  are  women  at  our 
counter  all  the  time,  and  we  have  six  or  seven  men  doing 
nothing  else  but  selling  bonds  the  same  as  a grocer  sells 
sugar  over  the  counter,  and  we  have  six  or  seven  men 
attending  to  that  day  in  and  day  out  the  year  around. 
Now,  there  is  a general  flow  of  these.  These  are  not 
people  that  are  bothered  with  income  taxes,  but  I think 
you  are  perfectly  right,  where  the  investor  has  to  con- 
sider the  income  tax,  he  discriminates  against  that  kind 
of  a security  now. 

Q.  Are  there  still  some  bonds  and  securities  coming 
from  abroad,  Mr.  Forgan?  A.  I think,  they  have  got 
down  pretty  well  to  the  bottom  of  their  pile.  About  the 
only  things  I hear  of  now  is  some  Scotch  Companies 
and  other  companies  that  put  out  debentures  over  there 
against  farm  mortgages  they  got  in  this  country.  They 
have  got  down  to  selling  them.  The  last  negotiations 
we  have  had  were  three  purchases  of  farm  mortgages. 
That  is  getting  down  to  the  bottom  of  the  bag.  There 
is  nothing  else  to  send.  Of  course  you  understand  for  these 
companies  that  have  these  farm  mortgages,  it  is  a splen- 
did time  to  sell  out.  They  send  them  over  here  and  sell 
them  in  dollars,  they  are  payable  in  dollars,  and  get 
their  exchange  about  25  per  cent,  discount  and  they 
get  their  money  over  there,  and  make  money  on  buying 


132 


the  sterling,  but  they  are  down  to  that.  I do  not  see 
any  other  kind  of  securities  coming  over  at  all. 

Commr.  Lucey : I was  going  to  ask  you  if  as  a matter 
of  fact  the  foreign  investor,  if  he  has  not  already  liqui- 
dated his  bonds,  might  not  sell  them  over  here  and  sell 
them  on  the  market  at  quite  a substantial  discount  and 
take  his  money  home  and  still  make  a substantial  profit 
by  reason  of  the  rate  of  exchange. 

A.  The  rate  of  exchange  would  be  about  25  per  cent. 
20  to  25  per  cent,  on  sterling,  I mean. 

Mr.  Cleveland : Mr.  ’ Forgan,  does  the  fact  that  the 
Commission  has  the  power  to  reduce  rates,  as  well  as 
increase  rates,  affect  the  value  of  these  securities! 

A.  Yes,  they  fear  they  wonT  stay  put.  ^ It  exists. 

Q.  Now,  if  it  should  be  brought  to  the  attention  that 
the  representatives  of  these  companies  had  publicly 
taken  the  position  that  there  was  $85,000,000  to  $90,000,- 
000  in  this  capital  account  that  represented  no  property 
at  all,  that  would  have  some  bearing  on  the  stability  of 
the  bonds,  would  it  not?  A.  Yes,  if  that  could  be  estab- 
lished, but  I should  hope  it  could  not  be  and  it  would  not 
be.  I do  not  think  there  is  much  possibility  of  that. 

Q.  If  it  should  further  appear  that  the  companies  rep- 
resented the  full  value  of  their  property  for  the  purpose 
of  taxation,  that  it  was  only  $52,000,000  as  against  $158,- 
000,0.00  in  their  capital  account,  that  is  also  a matter  that 
might  have  some  bearing  on  the  stability  of  the  securi- 
ties A.  Oh,  well,  I do  not  think  that  would  bother  the 
people  at  all. 

Q.  That  is  to  say  you  think  the  financiers  would  re- 
gard the  fact  that  there  was  some  undue  reduction  in 
valuation  for  taxation  purposes  as  no  indication  of  the 


133 


question  of  value  at  all?  A.  Well,  it  would  have  some 
indication  perhaps  of  value,  but  it  would  not  affect  those 
who  went  in  to  make  such  investigation  into  ,the  value  of 
the  property  as  they  would  have  to  make  before  they 
passed  judgment  upon  it. 

Chairman  Wilkerson:  You  understand  property,  for 
the  purpose  of  taxation  is  valued  on  one  basis  in  this 
state,  whereas  for  rate  making  purposes  it  is  valued  on 
another  basis  ? 

A.  Yes.  What  is  the  good  of  dodging  the  question? 
The  matter  of  taxation  of  every  big  concern  is  a matter 
of  compromise  right  through,  banks  and  everybody  else. 

Chairman  Wilkerson:  That  is  generally  understood. 

A.  That  is  generally  understood,  yes,  sir. 

Mr.  Cleveland:  The  matter  of  valuation  of  property 
for  rate  making  purposes, — now  I am  speaking  of  rate 
making  purposes, — is  that  the  same  as  the  valuation  of 
the  property  for  the  purposes  of  making  loans  or  making 
sales  or  investments? 

A.  Well,  if  it  is  not,  they  would  not  be  able  to  make 
the  loans.  The  two  will  have  to  hang  together  or  you 
won  T be  able  to  borrow. 

Q.  That  is  to  say  in  your  opinion,  the  property  should 
be  valued  for  rate  making  purposes  on  the  same  basis 
as  it  is  valued  for  the  purpose  of  making  loans  or 
sales  on  investments,  is  that  correct?  A.  I think  so, 
yes. 

Q.  Now,  if  it  should  be  brought  to  your  attention  that 
in  this  capital  account  there  are  included  such  items  as 
$10,000,000  for  franchises  which  are  not  properly  in- 
cluded for  rate  making  purposes  and  other  similar  items, 
would  that  affect  the  value  of  these  securities  and  the 


134 


stability!  A.  If  we  made  iip  our  minds  the  franchises 
were  not  worth  anything  we  would  have  to  cut  it  out. 
If  we  made  up  our  minds  it  was  worth  something  we 
would  leave  it  in. 

Q.  Supposing  it  was  brought  to  your  attention  that  in 
this  capital  account  there  was  included  a vast  amount 
of  old  equipment  that  was  discarded  and  of  no  value 
at  all  except  for  junk,  would  you  still  make  loans  or  in- 
vestment on  the  theory  that  that  property  was  as  good 
as  new!  A.  Oh,  no,  but  that  is  a matter  for  the  engi- 
neers and  not  for  the  bankers.  We  have  to  rely  upon 
the  engineers. 

Q.  But  the  bankers,  notwithstanding  any  valuation 
that  would  be  made  by  any  governmental  body,  if  there 
was  a big  loan  the  bankers  would  have  a valuation  made 
for  themselves,  would  they  not!  A.  That  might  not  be 
practical.  They  might  be  willing  to  take  the  valuation 
of  competent  engineers  employed  either  by  the  com- 
panies themselves  or  by  the  commission  here  or  by  who- 
ever else  employed  them  to  do  it, — if  we  believe  them  to 
be  reliable  engineers  and  put  confidence  in  their  state- 
ment,— ^we  would  accept  it. 

Chairman  Wilkerson : When  these  bonds  of  the  under- 
lying companies  of  the  surface  lines  were  disposed  of, 
did  you  regard  as  accurate  and  reliable  the  valuation 
which  had  been  made  by  the  Board  of  Supervising  En- 
gineers ? 

A.  We  did. 

Chairman  Wilkerson:  You  took  those! 

A.  Yes,  and  accepted  them. 

Chairman  Wilkerson:  And  accepted  them. 

A.  Yes. 


135 


Q.  And  the  fact  that  the  City  of  Chicago  through 
its  officers  has  placed  the  stamp  of  approval  on  those 
valuations,  did  that  have  anything  to  do  with  your  mak- 
ing up  your  judgment  as  to  whether  they  should  be 
accepted?  A.  Yes,  they  have  a franchise  on  the  basis 
of  that. 

Mr.  Cleveland:  Then,  Mr.  Porgan,  in  buying  these 
bonds,  did  you  take  into  consideration  or  assume  that 
the  contracts  between  the  City  of  Chicago  and  the  Surface 
Lines  were  valid  and  binding  contracts? 

A.  Oh,  yes,  we  believe  them  to  be. 

Q.  If  someone  had  told  you  at  that  time  that  it  rested 
in  the  power  of  the  City  Council  or  its  successors  in  that 
regard,  the  Public  Utilities  Commission,  to  reduce  the 
rates  of  fare  provided  in  those  ordinances  whenever  they 
wanted  to,  would  that  have  affected  the  stability  of  those 
securities?  A.  Well,  I do  not  know  that  I can  go  back 
on  that  hypothetical  case,  because  we  did  not  have  that 
to  consider  at  that  time,  but  we  would  consider  it  now. 

Mr.  Cleveland:  Yes.  That  is  all. 

Chairman  Wilkerson:  Call  the  next  witness. 


Harry  A.  AYheeler,  having  been  first  duly  sworn,  was 
examined  in  chief  by  Mr.  Dunbaugh  and  testified  as 
follows : 

Q,  Mr.  Wheeler,  will  you  state  your  name  and  con- 
nection with  the  bank  with  which  you  are  connected,  and 
also  your  connection  with  the  National  Association  of 
Commerce,  and  then  proceed  to  answer  some  questions 
that  have  been  asked  of  the  other  bankers  which  I think 
you  have  already  seen?  A.  My  name  is  Harry  A. 


136 


Wheeler.  I have  been  connected  as  the  vice-president 
of  the  Union  Trnst  Company  of  Chicago  for  10  years. 
Prior  to  that  for  10  years  as  president  of  a corporation 
having  to  do  with  industrial  and  commercial  credit,  and 
in  connection  with  the  Chamber  of  Commerce  of  the 
United  States,  its  president  for  three  out  of  the  nine 
years  of  its  existence. 

On  the  questions  that  have  been  propounded  to  the 
other  bankers,  I am  assuming  that  the  Commission  will 
be  perfectly  satisfied  with  the  representations  made  by 
those  who  are  charged  with  the  management  of  these 
properties  with  respect  to  the  necessity  for  future  ex- 
tensions, or  capital  extensions  of  these  properties.  My 
judgment  in  that  matter  would  be  of  only  the  same  value 
as  that  of  any  other  citizen  w^ho  might  estimate  the 
growth  of  the  community  and  the  resulting  growth  and 
demand  upon  the  utilities  that  serve  the  public.  Ob- 
viously with  a city  like  Chicago  growing  in  population 
as  it  is,  growing  in  industrial  importance,  as  it  is,  grow- 
ing in  the  number  of  homes  and  habitations  to  house  the 
people  that  are  coming  and  who  need  better  facilities  than 
they  have  enjoyed  in  the  past,  we  must  admit  that  there 
will  have  to  be  either  an  expansion  of  services  or  a lack 
of  service  of  those  things  which  the  people  have  come 
to  believe  as  their  right  and  as  the  things  that  come 
naturally  to  them  as  conveniences  and  comforts.  But  you 
also  must  take  this  into  account,  that  beside  the  ques- 
tion of  personal  comfort  and  convenience  is  the  import- 
ance to  the  commercial  and  industrial  life  of  the  city 
by  virtue  of  these  services,  that  of  getting  employes  to 
and  from  work,  that  of  supplying  power  with  which  to 
operate  our  factories,  that  of  supplying  lights  with  which 
to  light  them  when  the  season  is  short,  that  of  supplying 
the  means  of  communication  without  which  industrial 


137 


expansion  cannot  take  place.  So  that  there  is  no  question 
of  the  desirability  for  extensions  to  be  made  to  keep  pace 
with  the  reasonable  demand  of  commerce  and  industry 
and  of  public  comfort. 

Personally,  I hold  this  very  rigid  view,  that  there 
should  be  at  this  time  no  extensions  that  cannot  be  proven 
to  be  absolutely  necessary  to  the  commercial  needs  or 
to  the  physical  needs  of  the  people  of  the  city,  and  any 
improvements  that  are  contemplated  beyond  that  of  ren- 
dering the  reasonably  necessary  service  for  the  welfare 
of  the  community  are  improvements  that  should  be  de- 
ferred until  some  time  when  they  can  be  made  under 
conditions  of  less  stringency  than  at  present. 

Now,  with  respect  to  the  rate  of  return  it  seems  to  me 
that  it  is  all  a matter  of  the  competition  of  the  instru- 
mentalities of  service  and  of  commerce  for  money.  There 
is  only  so  much  money  that  can  be  legitimately  had  for 
use.  There  is  only  so  much  of  that  money  that  can  go 
into  public  utility  service.  The  competition  is  increas- 
ing every  year. 

The  listings  on  the  New  York  Stock  Exchange  in  the 
last  10  years  have  run  from  probably  393  stocks  in  1910, 
to  nearly  600  stocks  in  1920.  On  our  own  Chicago  Stock 
Exchange,  those  listings  have  also  increased,  not  per- 
haps to  the  same  extent  but  to  a very  marked  extent,  prob- 
ably from  about  50  or  54  to  95  or  nearly  to  100.  The 
same  condition  is  true  with  respect  to  the  bonds.  The 
listing  of  bonds  on  the  New  York  Stock  Exchange  and 
here  will  show  a like  condition,  showing  that  the  offerings 
in  competition  with  former  securities  are  increasing  con- 
stantly. Then  if  you  add  to  that  the  great  mass  of  un- 
listed securities,  those  that  may  be  sold  on  the  curb 
or  those  that  may  not  even  be  sold,  but  are  nevertheless, 


138 


offered  as  preferred  stock  and  as  industrial  securities 
by  the  houses  who  make  that  their  special  business,  you 
will  find  that  in  these  last  10  years,  you  have  increased 
the  competitive  element  between  people  desiring  money 
to  a point  of  infinitely  more  than  doubling  the  offers  and 
opportunities  of  investment  than  were  existent  10  years 
ago.  Furthermore,  I think  this  must  be  taken  into  ac- 
count, that  insofar  as  utilities  are  concerned,  when  those 
services  were  being  developed,  as  when  the  railroads  of 
the  country  were  being  developed,  the  public  desiring  a 
service  that  would  add  to  their  comfort  were  not  only 
very  ready  that  liberal  franchises  should  be  given,  but 
that  liberal  rates  of  return  should  be  had. 

Now,  the  fact  that  abuses  have  been  the  result  of  that 
liberality  may  be  admitted,  but  the  consideration  of  the 
present  time  in  the  light  of  the  abuses  of  the  past  will 
not  mend  the  present  situation,  and  in  consequence  it 
seems  to  me  that  the  temper  of  the  public  mind  with 
relation  to  the  utilities  securities  has  suffered  a marked 
change.  First  of  all,  in  the  uncertainty  perhaps  of  the 
franchise  conditions  that  underlie  the  utilities,  upon  the 
rate  of  return  which  they  may  earn,  upon  the  general 
criticism  that  has  come  upon  them  from  all  sources, 
sometimes  deserving  and  sometimes  grossly  unfair, — 
these  have  all  affected  the  public  mind,  and  the  public 
mind  is  the  thing  that  is  going  to  conclude  whether  or  not 
securities  may  be  sold  and  the  price  at  which  they  are  go- 
ing to  be  sold.  It  is  not  the  bank  rate.  The  banks  cannot  ’ 
absorb  them.  We  can  underwrite  them,  but  we  have  got  to  ^ 
pass  them  on,  and  we  must  create  a public  mind  that  will 
accept  with  confidence  these  securities,  else  of  course  they 
cannot  be  sold,  and  then  they  could  not  be  accepted  by 
us  in  the  first  instance. 


139 


Now,  the  trend  of  the  utility  market  has  been  a slou'gh- 
ing  off  of  values  in  particular  on  the  old  securities;  I 
believe  we  will  all  agree  that  that  is  the  result  of  a higher 
average  interest  rate  obtainable  in  other  things.  Their 
security  is  cut  out  on  a four  and  a half  or  five  per  cent, 
basis.  It  must  necessarily  react  in  its  market  value  to  the 
interest  rate  that  is  obtainable  upon  securities  of  like 
character  that  are  of  a newer  issue.  And  it  is  not  a mat- 
ter whether  capital  is  back  of  that  company  in  physical 
assets  that  might  represent  the  hundred  cents  on  the  dol- 
lar for  the  shares  of  stock  or  bonds  outstanding,  it  is  the 
fact  that  if  those  bonds  or  that  stock  yields  four  and  a 
half  or  five  per  cent,  and  it  comes  into  competition  with 
issues  that  are  well  known  of  a larger  earning  power  of 
seven  and  plus,  seven  and  eight  and  more,  then  of  course, 
the  market  value  of  that  security  must  decline  in  conson- 
ance with  the  rate  of  return  of  the  day. 

I think  also  there  is  this  factor  that  we  must  take  into 
account.  There  is  doubt  in  the  public  mind  as  to  the 
permanence  of  the  conditions  of  return  for  the  utilities, 
and  when  they  are  putting  that  doubt,  a doubt  that  is 
born  with  the  fact  that  there  are  other  forces  than  the 
executive  power  of  the  corporations  themselves  that  have 
to  do  with  those  returns,  the  controlling  and  regulating 
forces  that  necessarily  are  charged  with  the  obligation 
of  seeing  to  it  that  the  public  has  a service  and  at  the 
lowest  possible  rate,  they  turn  immediately  to  the  indus- 
trial securities  where,  as  it  has  been  said  this  morning, 
there  are  no  such  limitations,  and  they  find  themselves 
very  much  more  attracted  to  that  form  of  collateral. 

Now,  it  is  equally  true  that  the  public  mind  on  this 
question  is  affected  by  its  experience.  Where  at  an 
equal  time  or  on  an  even  date,  the  investor  bought  a 


140 


utility  security,  and  an  industrial  security,  on  today’s 
price  to  realize  on  them  both  they  are  likely  to  find  that 
the  utility  has  suffered  severely  in  the  market,  as  against 
the  industrial  rate. 

Furthermore,  the  public  has  been  educated  in  the  last 
few  years  to  a much  wider  range  of  securities  for  invest- 
ment. 

It  was  not  many  years  ago  when  the  average  in- 
vestor in  the  city  would  prefer  that  thing  which  they 
could  see  and  use.  They  bought  the  mortgage  on  city 
property,  and  they  bought  the  security  of  the  utility 
companies  because  they  were  near  at  hand,  they  were 
home  securities,  and  as  a consequence  gave  them  greater 
confidence  in  them.  In  these  last  few  years  the  very 
thing  I have  mentioned,  as  the  extension  of  the  listings 
of  the  securities  on  the  exchanges  of  the  country,  and 
the  government  securities  that  have  been  brought  out, 
which  always  run  at  a certain  differential  between  the 
government  rate  and  industrial  or  utility  rates,  and  the 
foreign  securities  that  have  come  to  our  shores,  and  the 
general  education  of  the  investing  public  to  more  broadly 
consider  investments  have  all  drawn  away  from  what  was 
at  one  time  a disposition  to  prefer  the  securities  of  the 
home  utility,  and  now  they  are  spread  all  over  the  face 
of  the  earth. 

It  seems  to  me,  gentlemen  of  the  Commission,  that  any 
rate  of  return  must  be  such  as  to  permit  competition 
with  the  other  securities  or  services  that  the  public  are 
invited  to  invest  in.  It  seems  to  me,  too,  that  there  is 
another  thing  that  might  have  your  consideration.  As 
in  the  development  and  extension  of  our  utility  services, 
as  in  the  development  of  our  industrial  operations  or 
anything  else  in  which  we  are  operating  today,  the  cost 


141 


of  extensions  and  betterments  and  improvements  is 
naturally  excessive  as  the  market  for  commodities  is  ex- 
cessive. You  cannot  have  index  number  rates  showing 
on  the  bulk  of  your  commodities  from  100  in  1913,  to 
253  in  March,  1920,  without  having  that  condition  evident 
that  extensions  and  improvements  that  are  necessary 
to  serve  the  people  are  to  be  made  at  a peak  point  in 
all  probability  where  the  cost  will  have  to  be  rapidly  writ- 
ten down,  or  if  capitalized  at  present  cost  interest  will 
have  to  be  paid  upon  that  capital  for  many  years  to  come; 
and  my  suggestion  for  your  consideration  is  this,  that 
in  the  fixing  of  the  rate  of  return  it  is  quite  legitimate 
to  consider  that  natural  excess  cost  of  introducing  these 
agencies  of  service  today  and  letting  the  rate,  at  least 
temporarily,  as  it  is  in  your  power  to  do  it,  cover  not 
only  a fair  return  upon  the  capital  investment  but  like- 
wise the  consideration  of  taking  up  that  excess  in  this 
day  when  all  of  our  prices  are  scaled  high  and  when  our 
wages  are  scaled  as  high  as  our  commodity  prices,  and 
-when  we  are  better  able  to  absorb  these  extraordinary 
and  unusual  expenditures  by  virtue  of  the  cost  of  com- 
modities, than  we  will  be  later  on  when  in  the  natural 
reaction  we  will  come  to  a more  normal  basis  in  connec- 
tion with  our  commodity  prices  in  this  country.  So  that 
it  seems  to  me  we  have  to  consider  the  fact  that  securi- 
ties will  not  sell  at  the  old  rate  that  they  must  sell  in 
competition  with  all  of  the  securities  that  are  offered 
and  multiplying  in  numiber;  and  that  there  is  difficulty 
in  getting  capital  enough  to  go  around  in  any  event,  and 
we  must  provide,  if  we  expect  to  have  the  facilities  for  the 
public,  that  which  will  enable  the  corporations  charged 
with  that  duty  to  operate  on  a basis  that  will  permit 
those  reasonable  extensions ; on  a basis  that  will  not 
capitalize  them  as  of  a date  in  the  future,  but  something 


142 


they  will  share  by  having*  ourselves  absorb  part  of  it  at 
the  present  time,  and  letting  the  future  bear  only  that 
which  might  be  the  normal  value  of  properties  and  secur- 
ities in  the  depreciation  that  must  be  taken  hereafter. 

We  have  done  that  same  thing  in  the  industrial  field, 
in  all  our  war  services,  as  you  well  know. 

During  the  war,  in  the  building  of  plants,  we  were  given 
very  large  depreciation  by  virtue  of  the  unusual  cost 
of  production  at  that  time,  and  the  unusual  wage  element 
that  entered  in.  Plants  that  were  built  then  that  are  not 
in  use  today  were  very  wisely  depreciated  in  value,  be- 
cause it  may  be  some  time  before  they  actually  come  into 
demand. 

Labor  conditions  likewise  are  the  same.  The  produc- 
tive power  of  the  man  has  been  reduced  by  the  uncertain 
conditions  that  exist  in  the  country,  and  all  of  these 
things  make  it  necessary  that  we  should  consider  ab- 
sorbing a part  of  the  cost  of  permanent  improvement 
at  the  present  time,  not  as  a charge  against  the  future 
for  100  per  cent  of  their  cost,  but  rather  that  we  should 
absorb  that  which  is  abnormal  and  unusual  at  this  time 
in  order  that  we  do  not  capitalize  for  the  future  those 
values  that  cannot  be  sustained  when  the  reaction  comes. 

That  is  all,  Mr.  Chairman. 

Chairman  Wilkerson : Do  you  care  to  be  cross-exam- 
ined now  or  what  is  your  own  preference  about  that,  Mr. 
Wheeler? 

Mr.  Wheeler:  It  is  immaterial  to  me,  but  I would 
like  to  be  released  by  half  past  12,  if  I may,  for  I have 
another  meeting. 

'Mr.  Cleveland:  If  they  have  other  witnesses,  we  will 
let  that  be  deferred  for  the  present. 


143 


Chairman  Wilkerson:  If  you  desire  to  ask  him  any 
questions  later  on,  we  will  let  you  know. 

Mr.  Dunbaugh:  That  is  all  with  Mr.  Wheeler. 

Chairman  AVilkarson:  Call  your  next. 

Mr.  Dunbaugh : Mr.  Piez. 

Chairman  Wilkerson:  You  have  been  sworn? 

Mr.  Piez:  Yes. 

Chairman  Wilkerson:  You  may  proceed  with  your 
statement. 

Mr.  Piez : Charles  Piez,  President  the  Link  Belt  Com- 
pany, President  Electric  Steel  Company,  both  of  Chi- 
cago. 

I want  to  apply  myself  more  directly  to  the  second 
question  that  has  been  asked,  and  that  is  the  influence  of 
the  development  and  expansion  of  public  utilities  on 
the  manufacturing  enterprises  of  this  city,  and  I want 
if  you  will  permit,  to  draw  from  my  own  experiences 
in  submitting  my  statement. 

About  five  years  ago,  I joined  with  several  associates 
to  organize  the  Electric  Steel  Company,  which  makes 
steel  castings  through  an  electric  process.  It  is  a con- 
tinuous operation  and  depends  largely  on  a continuous 
supply  of  power,  and  on  an  assured  supply  of  power. 

In  the  five  years  we  have  jumped  from  practically 
nothing  to  become  one  of  the  largest  of  the  25  largest 
users  of  electric  power  in  this  city,  purchasing  our  power 
from  the  Commonwealth  Edison  Company.  I think  our 
bills  now  run  somewhere  between  $8,000  and  $10,000  for 
power,  per  month. 

I am  interested  in  similar  enterprises  in  Philadelphia, 
where  we  purchase  power  from  the  Philadelphia  Electric 


144 


Company.  The  Philadelphia  Electric  Company,  how- 
ever, is  working  very  much  closer  to  the  limits  of  its  ca- 
pacity than  is  the  Commonwealth  Edison  Company,  to 
such  an  extent  in  fact,  that  whenever  anything  happens  at 
the  power  house,  our  supply  is  cut  off.  The  success  of  our 
enterprise  there  has  been  very  seriously  jeopardized 
through  that  fact.  In  fact,  we  have  been  shut  down  twice 
during  a month,  which  means  the  cessation  of  operation, 
the  re-lining  of  furnaces,  and  extraordinary  expense,  fail- 
ure to  make  deliveries,  and  so  forth.  I feel  from  that 
experience  and  the  experience  that  other  manufacturers 
in  this  city  have  had,  that  the  development  of  public 
utilities  should  lead  and  outline  the  development 
of  industries.  That  is  true  not  only  in  the  case  of  power 
production,  but  it  is  true  of  the  telephone  service,  and 
particularly  true  of  street  car  service. 

We  employ  at  our  39th  Street  plant  about  1,000  men. 
We  draw  not  on  the  immediate  neighborhood  for  those 
men,  but  have  to  draw  on  a very  wide  area.  It  is  not 
particularly  a residential  section,  and  poor  street  car 
service  simply  limits  the  area  from  which  we  can  draw 
and  makes  it  harder  for  us  to  get  men.  So,  poor  tele- 
phone service  or  the  lack  of  proper  expansion  of  that 
service  limits  our  ability  to  do  business,  and  I think 
it  is  absolutely  essential  from  the  standpoint  of  the 
manufacturers  of  this  city,  that  such  returns  be  allowed 
public  utilities  that  they  can  extend  their  facilities  to 
make  them  keep  step  with  the  growing  development  of 
the  industries  and  the  needs  of  this  community.  That 
ends  my  testimony. 


145 


Cross-Examination  by  Mr,  Cleveland. 

Q.  What  is  your  experience,  Mr.  Piez,  as  to  the  ade- 
quacy of  the  telephone  company’s  service  and  of  the 
street  car  company’s  service?  E.  Well,  I consider  the 
street  car  service  extremely  inadequate,  because  I have 
watched  for  many  months  and  many  years  the  tre- 
mendously crowded  condition  of  the  cars  whenever  our 
men  leave  our  plant. 

Q.  Will  you  describe  that  just  briefly,  what  that 
crowded  condition  is  ? A.  It  means  that  many  men  are 
not  able  to  take  a car  in  less  than  10  or  15  minutes,  they 
come  there  absolutely  crowded.  The  men  try  to  hold  on 
behind  and  they  are  jammed  in  such  a way  that  human 
beings  should  not  be,  and  they  are  not  very  comfortable 
under  the  conditions.  We  are  on  a cross  line  there  you 
know. 

Q.  Yes.  A.  And  then  there  is  another  wait,  because 
the  cross-town  line  simply  serves  to  transfer  our  men  to 
the  north  and  south  lines. 

Q.  Have  they  reached  the  point  in  your  neighborhood 
of  letting  then!  ride  on  the  roof?  A.  Not  yet,  but  it  may 
come  to  that. 

Q.  They  are  hanging  on  the  sides?  A.  They  are 
hanging  on  the  sides  in  a very  dangerous  way,  and  on  the 
rear. 

Q.  Are  you  depending  any,  or  do  your  men  use  the 
elevated  to  any  considerable  extent?  A.  Not  to  any 
great  extent. 

Q.  It  is  the  surface  lines?  A.  It  is  the  surface  lines 
I am  particularly  interested  in. 

Q.  The  telephone,  what  do  you  find  as  to  the  ade- 


146 


quacy  of  that  service  now?  A.  Well,  I do  not  think 
onr  service  is  as  good  as  it  was  some  years  ago.  I am 
not  as  conscious  of  the  crying  need  for  extensions  there 
as  I am  in  the  case  of  the  street  car  company,  and  as  I 
am  in  the  case  of  the  Commonwealth  Edison.  I feel 
that  we  ought  to  he  assured  that  their  extensions  will  at 
least  keep  step  with  our  needs  as  far  as  the  street  cars 
are  concerned,  and  I feel  that  they  have  lagged  way 
behind  our  needs. 

Q.  You  need . A.  Additional  cars. 

Q.  Additional  cars  and  equipment?  A.  Certainly. 

Q.  If  they  had  additional  cars,  could  they  operate 
them  on  the  rails,  or  would  they  need  new  rails,  too? 
A.  I have  not  made  an  investigation  as  to  that. 

Mr.  Cleveland:  That  is  all. 

Commissioner  Lucey:  Are  you  through,  Mr.  Dun- 
baugh  ? 

Mr.  Dunbaugh : I was  going  to  ask  him  one  more 
question. 

Q.  MTiat  in  your  opinion  has  the  war  had  to  do  with 
the  present  condition  of  the  utilities?  A.  I was  con- 
nected for  over  20  months  with  the  Emergency  Fleet 
Corporation. 

Q.  What  was  your  connection  with  that?  A.  I was 
vice-president  and  general  manager.  In  the  latter  part 
of  my  stay,  director  general  of  the  Emergency  Elect  Cor- 
poration. I know  as  far  as  we  are  concerned,  I was  a 
member  of  the  Utilities  Committee  of  the  War  Industries 
Board  and  we  discouraged  in  every  way  possible  invest- 
ments in  public  utilities  because  the  labor  and  material 
had  to  be  used  in  the  more  essential  enterprises.  In 
some  cases,  however,  the  Government  did  find  it  neces- 


147 


sary  to  extend  the  utilities,  and  I think  the  general  effect 
of  the  war  has  been  not  only  to  make  it  more  difficult  for 
the  utilities  to  get  proper  capital,  but  made  it  difficult 
for  them  to  get  labor  and  material  for  putting  it  in. 

Mr.  Dunbaugh:  That  is  all. 

Commissioner  Lucey:  Has  there  been  a marked  in- 
crease, Mr.  Piez,  in  the  wages  of  the  men  of  your  plant 
since  the  outbreak  of  the  war? 

A.  A very  marked  increase,  yes. 

Q.  Eoughly  what  percentage?  A.  I should  say  that 
common  labor  has  been  increased  from  220  to  240  per 
cent.  It  is  somewhere  between  two  and  a quarter  and 
two  and  one-half  times  what  it  was.  The  skilled  mechanic 
has  not  increased  as  much  as  that.  The  lower  priced 
labor  has  gone  up  very  much  heavier. 

Q.  That  has  been  your  experience,  and  we  may  assume 
similar  conditions  have  existed?  A.  Yes. 

Q.  And  now  exist  in  all  lines  of  labor?  A.  Yes;  that 
is  typical. 

Q.  And  it  is  reflected  in  the  materials ‘you  purchase 
and  produce?  And  it  is  reflected  in  your  selling  price 
when  they  go  on  the  market?  A.  Yes,  I had  occasion 
to  submit  to  the  board  two  weeks  ago  what  working 
capital  we  had  today  as  compared  to  the  year  1916, 
which  was  a very  flourishing  year,  and  which  had  very 
much  lower  basis  of  value.  Our  working  capital  now  is 
two  and  a half  times  as  much  today  as  then.  Our  pro- 
duction in  1 910,  was  only  10  per  cent,  less,  that  is  actual 
pounds  produced  in  our  plant.  The  increase  is  very 
slight,  but  the  money  necessary  to  carry  on  the  business, 
by  reason  of  the  very  tremendous  advance  in  the  mate- 
rials and  labor,  was  two  and  one-half  times  what  it  was 
four  years  ago. 


148 


Q.  Have  you  made  any  study  as  to  the  condition  of 
the  companies  you  referred  to,  the  utilities  in  the  city 
here,  as  to  their  capitalization,  value  of  their  properties, 
and  what  may  or  may  not  be  necessary  in  order  to  permit 
them  to  function  properly?  A.  I have  not,  hut  about 
a year  ago  I sold  whatever  interest  I had  in  the  utilities 
here. 

Q.  Was  there  any  special  reason  for  selling  out  then, 
because  they  were  utility  properties,  or  anything  else? 
A.  I knew  of  the  common  prejudice  against  them,  yes. 

Q.  What  do  you  refer  to  when  you  say  the  common 
prejudice  against  them?  A.  I made  these  investments 
largely  because  I felt  they  were  safe.  I am  not  in  the 
habit  of  speculating  outside  of  my  own  business.  What 
money  I accumulate  there  I want  to  put  into  safe  invest- 
ments, so  I invested  in  railroad  securities  and  some  bonds 
of  the  Chicago  Telephone  Company  and  the  Common- 
wealth Edison  Company  of  this  city.  And,  my  general 
belief  is  that  any  property  subjected  to  the  regulation  of 
a commission  is  a rather  hazardous  property.  I am 
saying  this  with  all  due  deference  and  I am  not  mak- 
ing any  remarks  or  charges  against  this  Commission. 

Q.  Do  not  hesitate  on  that  account.  A.  I know,  Gen- 
eral. you  are  absolutely  used  to  that  sort  of  a charge. 
I want  to  say  this : My  experience  as  a railroad  investor 
goes  back  a good  many  years,  and  I think  the  Interstate 
Commerce  Commission  has  perhaps  been  as  much  re- 
sponsible for  the  general  prejudice  against  commission 
control  as  any  other  body  in  this  country.  I think  it  is 
absolutely  certain  that  the  Commerce  Commission  con- 
sidered regulation  as  a restraint,  and  it  strangled  the 
property  practically,  and  I saw  whatever  investments  I 
had  in  such  roads,  the  good  roads,  the  Pennsylvania 


149 


Railroad,  for  instance,  gradually  declining,  declining  in 
their  price  and  declining  in  their  returns,  and  I made  up 
my  mind  I had  better  get  out  before  I hit  the  bottom,  so 
I did. 

Q.  While  the  going  was  good?  A.  Yes,  sir;  I am 
glad  I did.  I put  the  money  into  industrial  enterprises 
and 

Q.  Of  course,  at  that  time  a year  ago,  as  is  true  now, 
the  returns  on  the  investment  which  you  had  made  were 
and  are  much  lower  than  you  might  have  made  on  indus- 
trials in  the  market?  A.  I would  not  have  changed  on 
that  account,  what  I was  after  was  security.  I had 
grave  doubts  as  to  whether  those  values  at  that  time 
would  be  maintained  in  the  long  run. 

Q.  There  was  no  question  in  your  mind  when  you 
made  those  investments,  that  the  underlying  value  of 
those  plants  and  institutions  in  which  you  invested  was 
good?  A.  Not  at  all. 

Q.  As  a matter  of  fact,  looking  at  it  in  a business 
way,  have  you  seen  anything  since  other  than  what  you 
may  now  think, — is  this  uncommon  prejudice  which  you 
referred  to,  which  may  be  in  the  air,  and  may  be  in  men’s 
minds,  whether  or  not  it  is  justified?  As  a business  prop- 
osition have  you  seen  any  decline  in  the  actual  value  of 
those  properties  from  what  they  were  at  the  time  you 
made  those  investments?  A.  No,  sir;  I have  not,  but  this 
thing  concerns  the  investor,  and  that  is,  how  readily  are 
these  stocks  marketable?  If  there  is  a general  prejudice 
against  them,  whether  their  value  is  maintained  or  not, 
their  marketability  is  hard,  and  I like  to  have  securities 
that  are  fairly  liquid. 

Q.  Well,  that  is  your  personal  idea?  A.  Yes,  that 


150 


is  my  personal  experience,  I only  offer  it  as  a personal 
experience,  one  of  many  similar  ones  that  I have  had. 

Q.  As  a manufacturer  in  the  City  of  Chicago,  you 
are  undoubtedly  very  materially  affected  by  the  pros- 
perity or  non-prosperity  of  these  utilities  from  which  you 
have  service  which  you  demand  and  need?  A.  Abso- 
lutely; we  believe  service  is  primary  and  the  rate  second- 
ary. 

Q.  I judge  it  is  your  viewpoint  that  these  companies 
should  he  given  a sufficient  opportunity  to  earn  money 
with  which  to  supply  street  cars  or  telephone  instruments 
or  dynamos  or  any  other  machinery  or  equipment  that 
they  need,  in  order  to  supply  the  wants  of  the  city?  A.  I 
certainly  feel  that  way.  General,  or  we  will  have  to  go 
to  some  other  place  for  any  further  expansions  that  we 
have  to  make. 

Q.  And  the  lack  of  that  situation  is  not  only  reflected 
in  the  prosperity  of  your  company  in  which  you  are 
unquestionably  interested,  but  it  is  reflected  as  well  in  the 
conditions  and  opportunities  which  the  men  who  work 
in  your  plant,  enjoy,  in  their  efforts  to  get  to  and  from 
their  work?  A.  It  makes  the  community  a more  desir- 
able one  to  live  in,  and  therefore,  a better  place  for 
manufacturers  to  be  in,  if  the  utility  companies  are  pre- 
pared to  give  adequate  and  comfortable  service,  par- 
ticularly so  far  as  the  service  that  the  men  are  directly 
interested  in  is  concerned. 

Q.  As  a matter  of  fact,  isn’t  it  your  viewpoint  or  isn’t 
it  your  idea  that  the  intention  was  such  that  when  these 
corporations  were  subjected  to  public  regulation,  instead 
of  having  a bad  effect  on  the  corporation  as  compared 
with  an  industrial,  which  is  not  regulated,  that  in  truth 
and  fact  the  security  of  the  regulated  utility  should 


151 


be  a better  and  sufficient  security  than  the  unregulated 
industrial  property,  because  it  is  not  subject  to 
the  dangers  which  the  industrial,  your  own  business 
for  instance,  must  meet,  without  protection  of  any  Board 
or  Commission  to  fix  its  rates  or  terms  and  guarantee 
it,  say,  against  competition  and  against  confiscatory  rates 
and  against  many  other  annoyances  and  contingencies 
that  in  your  private  business  you  must  compete  with  by 
yourself  and  your  own  Board  of  Directors;  wasn’t  that 
the  intention  in  your  mind,  wasn ’t  that  your  understand- 
ing of  the  regulation  of  the  utility?  A.  It  certainly  was. 
I realize,  of  course,  being  monopolies,  regulations  had 
to  be  effected.  I feel  that  constructive  regulation  would 
certainly  be  helpful  to  the  securities  and  the  utilities 
themselves.  There  are,  of  course,  advantages  in  monop- 
oly df  properly  restrained,  compared  with  open  compe- 
tition such  as  large  industries  have  to  engage  in,  so  from 
the  standpoint  of  the  private  investor  who  has  some 
money  to  put  into  these  securities,  I felt  at  the  time  the 
control  of  the  utility  by  this  Commission  was  a good 
thing,  because  I invested  in  the  properties  after  this 
Commission  was  appointed. 

I am  not  prejudiced  against  regulation;  I feel,  how- 
ever, some  hesitation  about  the  effect  which  public 
clamor  might  have  on  a Commission.  I am  not  saying 
this  Commission.  Of  course,  the  users  always  feel  that 
they  are  paying  higher  prices,  we  as  users  feel  as  Mr. 
Sunny  felt  in  the  matter  of  his  bank  loan,  that  we  want 
to  get  the  lowest  possible  rates.  We  are  not  particularly 
concerned  about  the  amount  of  the  investment  or  the  re- 
turn on  the  investment ; that  is  the  business  of  the  utility 
company.  It  is  a bargain  or  barter  between  us,  so  the 
consumers  are  always  on  the  side  of  the  lower  rates. 


152 


So  the  Commission  is  in  a very  difficult  position  to  resist 
public  demand  for  reductions  and  to  insist  that  rates 
be  maintained  at  a point  that  not  only  will  there  be  ade- 
quate return  to  the  investors,  but  an  adequate  return  to 
enlist  additional  investments  to  permit  the  necessary 
expansion  of  industries  and  to  maintain  a proper  rate  of 
depreciation. 

Q.  Would  there  be  in  your  mind  any  question  that 
if  the  truth  about  the  situation  could  be  gotten  to  the 
public  at  large,  if  they  were  given  an  opportunity  to  learn 
the  real  facts,  if  anyone  can  devise  a manner  or  method 
of  giving  that  information  to  them,  rather  than  the  per- 
verted statements  of  what  may  or  may  not  be  the  facts, 
or  what  someone  may  think  is  a fact,  but  which  may 
be  found  different  by  the  Board  when  fina/lly  deter- 
mined,— what  I had  in  mind  was  if  the  public  was  apprised 
as  to  what  the  situation  really  was,  do  you  still  think 
there  would  be  in  the  mind  of  the  average  man  this  prej- 
udice you  spoke  of  1 A.  It  is  a little  hard  to  eradicate  a 
general  prejudice,  but  I think  such  hearings  as  this,  to 
air  these  questions  publicly,  will  have  the  effect  of  re- 
storing the  public  confidence.  Of  course,  this  is  an  un- 
usal  time,  there  is  a good  deal  of  competition  for  what- 
ever money  is  available,  but  it  is  true,  nevertheless,  there 
is  a prejudice  against  investments  in  public  utilities,  and 
the  good  share  with  the  poor  that  disadvantage  in  a bor- 
rowing capacity. 

Q.  That  prejudice  arises  in  the  mind  of  the  public 
from  some  cause?  A.  Yes,  sir. 

Q.  It  didnff  grow,  you  don’t  inherit  any  prejudice 
against  a public  utility?  A.  Some  prejudice  is  in  the 
air,  it  may  not  originate  in  Illinois,  may  be  down  east, 
and  spread  to  Illinois.  I think  the  recent  passage  of  the 


153 


Transportation  Act,  its  definition  of  what  costs  should 
be,  its  statement  as  to  what  the  average  return  should  be 
to  the  investors,  is  going  to  have  a very  helpful  effect 
in  restoring  public  confidence  in  the  railroad  securities. 
Now,  I think,  reflectively  in  the  public  utilities,  because 
more  or  less  that  Act  will  become  more  or  less  the  basis 
of  consideration  of  all  of  the  problems  of  the  public  utili- 
ties in  adjudications.  1 think  the  process  of  restoring 
public  confidence  is  on  the  way,  public  confidence  has 
got  to  be  earned  through  a long  period,  and  any  un- 
toward action  at  any  time  may  destroy  it.  Money  is 
exceedingly  hesitant  and  a timid  sort  of  affair,  it  does 
not  go  boldly  into  enterprises  and  gamble,  but  the  in- 
vestor is  a very  timid  sort  of  a chap  and  he  wmnts  to  be 
dead  sure,  pretty  nearly,  particularly  when  the  return  is 
low. 

Q.  You  spoke  of  the  Interstate  Commerce  Commis- 
sion as  having  interpreted  its  powers  as  a restrictive 
Commission?  A.  That  is  my  impression.  General.  I 
might  be  wrong  as  to  that,  but  that  is  a very  strong  im- 
pression. 

Q..  And  quite  a number  might  possibly  agree  with  you. 
And  when  this  Commission,  using  Illinois  as  an  illustra- 
tion, came  in,  they  all  came  in  about  the  same  time, 
this  one  came  in  in  January,  1914,  it  found  a great 
many  utility  corporations  which  through  mistaken  no- 
tions of  regulation,  if  regulation  it  was,  by  municipali- 
ties, had  rates  based  either  upon  no  valuations  or  as 
a result  of  dickering  with  city  councils,  who  either  did 
not  know  or  did  not  care  what  the  situation  was,  and 
the  Commission  started  out  on  its  way  by  reducing  rates 
the  first  two  or  three  years,  very  largely,  and  then  there 
came  the  conditions  in  this  country  as  a reflection  from 


154 


the  war  breaking  out  in  Europe  and  the  period  of  cur- 
tailment began  to  take  effect,  followed  by  the  war  in 
our  own  country,  and  the  conditions  would  still  exist,  and 
the  Commission  found  it  necessary  to  advance  rates  in 
order  to  meet  costs  and  expenses  incident  to  that  condi- 
tion of  affairs  which  changed  the  public  opinion,  I rather 
im.agine,  in  the  usefulness  of  the  Commission.  What 
I am  trying  to  get  at  is,  while  this  Commission  or  its 
predecessor  was  reducing  rates  and  reducing  valuations, 
it  was  a very  popular  commission  and  was  considered  a 
great  good  to  have  been  created,  but  the  gentlemen  who 
have  inherited  the  situation  finding  opposite  conditions, 
making  it  necessary  to  increase  rates,  have  not  been  as 
popular,  either  with  the  public  or  municipalities  and 
that  condition  of  affairs — or  let  me  ask  you  if  you  think 
that  condition  of  affairs  by  reason  of  the  stirring  up  of 
the  utility  question,  with  what  follows  after,  the  outcries 
from  the  mayors  and  city  councils  of  the  municipalities 
or  consumers,  have  rather  prejudiced  the  public  against 
the  whole  utility  proposition,  without  really  knowing 
what  the  facts  may  be  or  are?  A.  I think  that  is  true. 
Of  course,  the  members  of  the  Commission  have  my 
very  deep  sympathy  in  their  efforts.  I appreciate  their 
position,  very  fairly,  but  nevertheless  the  work  has  got 
to  be  done  and  I am  here  to  assure  the  Commission  that 
constructive  effort  on  its  part  will  at  least  have  the 
earnest  support  and  the  cordial  approval  of  all  the  in- 
dustries in  the  city. 

Chairman  Wilkerson:  You  are  a man  of  very  wide 
affairs.  Do  you  know  of  any  way  in  which  we  can  make 
men  tell  us  the  truth?  That  seems  to  be  our  chief  diffi- 
culty, to  prevent  their  lying  to  us. 

A.  If  I had  that  kind  of  a method,  I think  I would 
syndicate  it. 


155 


Mr.  Cleveland:  Mr.  Piez,  is  the  population  of  Chicago 
growing  rapidly? 

A.  Well,  Mr.  Cleveland,  you  are  about  as  well  versed 
in  that  as  I am. 

Q.  I am  not  testifying.  A.  I was  not  testifying 
on  that  particular  part,  I am  not  in  touch  with  the  abso- 
lute percentage.  I noticed  we  had  a very  wholesome 
growth,  but  I cannot  tell  you  the  exact  percentage  or 
increases. 

Q.  When  you  speak  of  capital  being  procured,  you 
mean  to  get  new  money  to  invest  in  the  business,  do  you 
not?  A.  In  what  particular  sense  do  you  mean  that? 

Q.  You  speak  of  capital,  you  mentioned  capital?  A. 
Money,  yes,  I did  not  mean  capital.  I mean  money,  of 
any  kind,  to  effect  advances,  either  credit  or  capital. 

Q.  Yes;  is  it  your  idea  that  money  for  necessary  ex- 
tensions to  be  made,  I do  not  mean  by  that  depreciation, 
but  to  make  extensions  and  enlargements,  should  be 
raised  by  means  of  rates  paid  by  the  public?  A.  What 
I mean  is  if  you  are  going  to  get  additional  money  to  in- 
crease or  expand  your  enterprises,  you  have  to  establish 
two  things,  first,  an  assurance  in  the  profitable  nature  of 
your  enterprise,  and  second,  an  assurance  as  to  a suffi- 
cient rate  of  earnings  to  induce  men  with  money  to  invest. 
That  is  what  I meant. 

Q.  Of  course,  if  you  take  a new  enterprise A. 

You  cannot  force  an  investment.  In  other  words,  you 
have  to  induce  it,  and  you  have  to  induce  it  by  estab- 
lishing confidence  and  holding  out  fairly  good  terms  of 
return. 

Q.  I am  speaking,  take  an  established  concern,  a pub- 
lic utility,  that  wants  to  make  new  extensions,  is  it  your 


156 


idea  it  would  be  proper  to  impose  rates  on  the  people  in 
order  to  get  money  to  make  these  extensions?  A.  If 
the  extensions  cost  twice  as  much  as  before,  and  assum- 
ing the  return  remains  the  same,  manifestly  you  cannot 
pay  interest  on  the  money  necessary  to  make  the  exten- 
sions at  the  time.  I agree  with  Mr.  Wheeler  very  thor- 
oughly you  have  to  do  something  with  rates  to  induce 
investors  to  come  in  and  invest  the  money,  and  then  you 
have  to  do  enough  with  rates  to  write  oft  a part  of  that 
investment,  so  it  wonh  be  a burden  on  the  community 
hereafter. 

Q.  Whatever  it  is,  the  investment  should  come  from 
the  outside  and  not  from  rates,  isn^t  that  true,  for  exten- 
sions? A.  I don’t  gather  that,  our  money  comes  from 
the  selling  price  of  our  product,  and  I assume  the  utili- 
ties get  their  return  from  the  selling  price  of  their  ser- 
vice, and  that  selling  price  is  regnlated  by  the  Commission 
in  the  matter  of  rates,  and  so,  therefore,  the  rates  directly 
affect  your  income. 

Q.  Then  if  I understand  you  correctly,  take  the  Sur- 
face Lines,  if  you — if  they  were  to  build  an  entirely  new 
extension,  you  think  the  rate  payer  should  be  subjected 
to  paying  sufficient  rates  to  furnish  capital  to  the  com- 
panies to  make  that  extension?  A.  Let  me  say  this: 
Suppose  it  was  absolutely  necessaiy  to  the  community 
that  extensions  be  made,  and  no  money  could  be  secured 
except  by  an  increase  of  rates,  would  you  justify  that  rate 
in  order  to  have  the  facility? 

Q.  I am  trying  to  get  your  viewpoint?  A.  I am 
asking  you  on  that. 

Q.  I might  not  give  the  right  answer.  Do  you  think 
they  should  be  imposed  on  the  people  to  provide  capital 
to  make  the  extensions?  A.  I think  that  is  not  quite 


157 


what  you  mean ; rates  should  be  imposed  to  provide  cap- 
ital, or  invite  capital? 

Q.  Provide?  A.  Provide. 

Q.  I mean  provide  capital.  A.  It  is  not  satisfactory 
to  answer  a question  by  asking  another  one,  of  course. 

Chairman  Wilkerson : You  may. 

A.  But  if  that  is  the  only  way  to  get  it,  what  else  is 
there  to  do? 

Mr.  Cleveland : I am  just  asking  you. 

A.  I don’t  see  any  other  way  out  of  it,  I do  not  see 
that  anybody  is  going  to  make  you  a gift  of  the  exten- 
sions. 

Q.  If  it  is  shown  that  there  is  an  inadequacy  of  service, 
is  it  your  idea  that  that  inadequacy  should  be  removed 
by  an  increase  in  the  rate  of  fare?  A.  I am  telling  you 
this  car  service  is  terribly  inadequate,  and  I have  not 
gone  into  the  question  of  the  justice  of  it,  and  I don’t 
know  anything  about  the  amount  of  money  invested  in  the 
street  car  service,  but  I do  say  that  a continuation  of 
the  present  service  is  a detriment  to  the  community  and 
something  ought  to  be  done  about  it.  I think  this  thing 
ought  to  stop  and  the  two  sides  ought  to  get  together  and 
give  us  the  service  that  we  need. 

Q.  Has  it  ever  occurred  to  you  that  in  the  Street  Rail- 
ways Company,  for  instance,  in  order  to  get  the  exten- 
sions on  which  they  are  to  make  more  money,  that  the 
stockholders  or  some  of  the  people  who  are  interested 
in  it  might  put  up  the  money  to  make  those  extensions, 
instead  of  calling  on  the  people  to  furnish  those  exten- 
sions? A.  That  depends  a little  on  the  confidence  the 
stockholders  have  in  the  enterprise.  I can  hardly  answer 
that  without  going  into  the  result  of  the  operations  from 


158 


a financial  standpoint.  I know  this  is — if  I am  at  the  head 
of  an  industry  and  I have  not  shown  profits  for  some 
years,  it  is  mighty  difficult  for  me  to  have  my  stockhold- 
ers put  up  money.  I suppose  there  is  a certain  analogy 
between  the  conduct  of  the  industry  and  the  conduct  of 
a public  corporation. 

Q.  Well,  that  don’t  quite  answer  the  question,  do  you 
want  to  let  it  stand  at  that,  is  that  as  well  as  you  can 
answer  it?  A.  That  don’t  answer  the  question?  Then 
I don’t  understand  the  question. 

Q.  My  question  is  whether  in  case — ^we  assume  that 
they  need  extensions,  that  the  service  is  inadequate,  is  it 
your  view  that  the  stockholders  should  not  be  called  on 
to  make  the  necessary  extensions  to  remove  the  inade- 
quacy, rather  than  calling  on  the  people  to  pay,  provide, 
that  money  by  means  of  increased  rates?  A.  Can  you 
force  the  stockholders  to  invest? 

Q.  You  are  just  asking  questions  back.  A.  You  are 
not  giving  all  of  the  conditions  of  the  problem. 

Q.  Why  can’t  you  answer?  A.  Are  you  assuming 
for  instance  that  this  concern  has  paid  adequately  and 
is  giving  adequate  returns  to  the  stockholders,  so  that 
they  have  confidence  in  its  continued  earning  power,  is 
that  one  of  the  bases  of  the  question? 

Q.  I am  assuming  that  they  are  having  a service  that 
is  inadequate  and  have  a need  of  extensions.  A.  I am 
just  here  as  a private  citizen. 

Q.  Whether  it  is  your  view  that  this  company  should 
go  to  the  people  and  say,  ‘ ‘ Here  we  need  extensions,  you 
pay  for  them  and  we  will  make  the  extensions  and  we 
will  keep  them  ourselves  ? ” A.  How  else  can  you  raise 
it?  Do  you  expect  the  stockholders  to  make  a contribu- 


159 


tion  to  the  public?  I am  simply  asking  the  question  in 
order  to  get  your  answer  to  that,  and  then  I will  be  in  a 
position  to  answer  fully. 

Q.  If  you  want  to  know  my  position,  it  is,  if  they 
want  a system  to  pay  rates,  they  should  invest  the  money 
necessary  for  the  extensions,  that  is  my  view?  A.  Well, 
they  should  be  reasonably  sure  of  the  rates  before  they 
invest  the  money. 

Q.  Yes,  they  ought  to  have  the  investment,  they  ought 
to  put  the  investment  in?  A.  What?  Without  assur- 
ance of  return?  I do  not  know  where  you  could  find 
them;  I would  like  to  corral  some  stockliolders  of  that 
sort. 

Q.  Now,  then,  you  have  your  investments  in  steam 
railroads?  A.  No,  sir;  I am  out  of  railroads  and  utili- 
ties. 

Q.  It  was  steam  railroads,  it  was  not  the  Surface  Lines 
or  the  Elevated  Lines?  A.  No,  sir;  just  steam  rail- 
roads; no,  I have  never  gone  in  for  the  Surface  Lines, 
thank  Heaven. 

Q.  Now,  I understand  you  to  say  that  you  have — ^you 
think  in  cases  of  monopolies,  these  are  monopolies,  are 
they  not,  here?  A.  Yes,  sir. 

Q.  That  regulation  is  proper?  A.  I agree  to  that, 
yes,  sir. 

Q.  As  long  as  regulation  is  proper,  this — it  is  a mat- 
ter of  public  consideration  what  regulation  is  given,  nec- 
essarily so,  isn’t  it?  A.  Yes,  the  broadest  kind  of  public 
consideration. 

Q.  Yes.  A.  Not  the  immediate  needs,  but  the  needs 
of  the  community  for  the  future,  taking  into  account  the 
proper  expansion. 


160 


Q.  It  is  necessarily  an  incident  to  that,  first,  that  the 
people  will  have  a right  to  consider  the  kind  of  service 
that  they  are  getting  and  the  kind  of  regulation  that 
they  are  getting,  that  is  true,  isn’t  it?  That  is  true  if 
you  have  regulation?  A.  If  you  have  regulation,  yes. 
The  obligation  is,  of  course,  then,  to  furnish  the  proper 
kind  of  information  to  the  people  so  that  they  may  judge 
properly. 

Q.  And  the  only  way  to  do  that  is  to  get  the  truth 
to  the  people,  that  is  the  only  way,  isn’t  it?  A.  As  I 
see  it. 

Q.  If  they  get  the  truth  to  the  people  and  the  people 
know  that  the  company  is  trying  to  operate  on  mis- man- 
agement and  trying  to  operate  on  watered  stock,  the  truth 
is  liable  to  do  some  harm  to  the  company,  isn’t  it?  A. 
Do  you  claim  that  that  is  the  situation  here  ? 

Q.  I say  that  the  truth  would  hurt  them  then?  A. 
Is  that  a hypothetical  question  or  does  it  apply  to  this 
case  ? 

Q.  It  is  a hypothetical  question.  If  the  truth  showed 
a rotten  condition,  it  would  not  do  the  company  any  good? 
A.  Certainly  not. 

Q.  The  thing  to  do  then  is  to  get  the  truth  to  the 
people,  and  it  is  up  to  the  people  who  are  interested  to 
bring  the  truth  to  the  people,  isn’t  it?  A.  I shquld  say 
so. 

Q.  And  it  is  all  depending  on  what  the  truth  shows 
what  the — whether  the  public  utility  will  be  helped  or 
hurt?  A.  That  is  the  purpose  of  this  hearing,  isn’t  it? 

Q.  Well,  That  is  one  of  them.  A.  Yes,  sir. 

Q.  And  another  one  is  the — about  the  extensions. 
You  agree  that  they  need  extensions?  A.  I agree  that 


161 


the  service  is  rotten  rticI  that  they  need  extensions  and 
I think  you  will  agree  with  me,  that  the  people  who  are 
operating  the  companies  ought  to  get  the  money  some- 
how to  make  these  extensions. 

Q.  You  have  not  developed  any  way  of  getting  it? 
A.  That  is  up  to  them. 

Q.  I can  very  readily  tell  a way  if  you  want  me  to 
testify,  but  I am  not  on  the  witness  stand.  That  is  all. 

Cross-Examination  hy  Mr,  Ringer. 

Q.  Suppose  the  utility  in  question  had  during  its  en- 
tire corporate  existence  shown  splendid  management  and 
a very  handsome  return  to  the  stockholders  and  a con- 
stant growth  in  the  value  of  the  property,  would  that 
change  your  answer  to  the  method  of  raising  the  re- 
quired capital  for  the  proposed  improvement?  A.  I do 
not  believe  there  would  be  any  question  about  raising 
the  required  capital  under  such  conditions  as  that.  There 
might  be  temporary  questions.  Of  course  this  thing  has 
to  be  borne  in  mind. 

Q.  I beg  your  pardon?  A.  This  thing  has  to  be  borne 
in  mind  in  all  of  these  matters,  and  that  is  rate  of  re- 
turn to  enlist  capital  has  to  be  increased.  It  is  very 
much  so  today  when  industries  are  paying  seven  and  one- 
half  per  cent,  on  commercial  paper,  instead  of  four  and  a 
half.  You  have  to  realize  like  labor  capita]  is  earning 
a higher  rate  of  pay.  Unless  you  give  that  question  con- 
sideration, you  will  fail  to  enlist  capital  or  a proper 
amount  of  capital  to  make  extensions,  irrespective  of  any 
local  questions  which  may  affect  the  value  of  property. 
This  Commission  has  to  bear  in  mind  that  rates  have  to 
advance  with  the  rise  of  capital  in  the  open  market,  oth- 


162 


erwise  you  are  going  to  sag  and  lag  behind  and  not  get 
proper  capital  to  make  your  extensions. 

Q.  Suppose  the  stockholders  in  our  utility  in  ques- 
tion— A.  You  know — I want  to  say  this,  I am  not  an 
expert  on  public  utilities,  I am  an  expert  in  manufactur- 
ing. If  you  gentlemen  want  my  personal  opinion  and 
answer  to  this  hypothetical  question  I am  perfectly  will- 
ing to  spend  the  time,  but  I do  not  want  to  qualify  as  an 
expert  for  this  Commission,  because  they  realize  I am 
not. 

Q.  Take  with  an  industrial  corporation,  suppose  the 
stockholders  of  an  industrial  corporation  during  the  en- 
tire life  of  their  stock  holding  had  received  very  hand- 
some returns  running  from  8 to  50  per  cent,  on  their  in- 
vestments, and  had  since  their  original  investment  been 
many  times  repaid  the  amount  of  the  investment  and 
the  plant  had  grown  immeasurably  during  the  entire  life 
of  their  investment  and  these  self-same  stockholders  who 
originally  invested  capital  are  still  stockholders, — would 
you  conceive  it  possible  for  those  stockholders  to  dig 
some  way  into  their  own  pockets  to  raise  the  required 
capital  to  cover  the  contemplated  extensions  ? A.  I think 
a wise  management,  if  the  earnings  had  been  anywhere 
from  8 to  50  per  cent. — 

Q.  I donh  mean  earnings,  dividends  actually  paid? 
A.  — would  have  provided  for  the  extensions  out  of  the 
earnings. 

Mr.  Einger : That  is  all.. 

Mr.  Eichberg:  I would  like  to  ask  one  question  that 
I think  the  record  is  inadvertently  not  clear  on. 

Chairman  Wilkerson:  You  may  proceed. 

Mr.  Eichberg:  Did  you  mean  to  say  the  average  of 


163 


all  wages  had  increased  between  225  and  and  240  per 
cent.?  A.  No,  I said  common  labor,  the  lowest  priced. 

Q.  The  lowest  priced?  A.  Yes,  sir.  I said  that. 

Q.  You  mean  that  applies  generally  across  the  United 
States?  A.  Yes,  I think  the  common  labor  has  gone  up 
somewhere  between  two  and  a quarter  and  two  and  one- 
half  times. 

Q.  I think  the  record  may  have  borne  a misimpression 
on  that.  A.  I made  that  statement  very  clearly. 

Q.  Are  you  familiar  with  the  Government’s  statistics 
on  the  average  increase  of  wages  to  labor  in  the  last 
four  years?  A.  I am  not;  I know  what  it  has  been  in 
my  own  industry.  If  it  is  essential  to  the  record,  I will 
look  it  up  and  give  you  the  facts. 

Mr.  Eichberg:  That  is  all. 

Mr.  Dunbaugh:  That  is  all. 

Chairman  Wilkerson:  Call  your  next. 

Mr.  Dunbaugh:  Mr.  Folds. 

Mr.  Folds:  Charles  W.  Folds,  member  of  the  firm  of 
Hathaway,  Smith,  Folds  and  Company,  brokers  and 
bankers;  chairman  of  the  Board  of  Federal  Securities 
Corporation. 

Mr.  Dunbaugh:  You  have  seen  these  questions? 

Mr.  Folds:  I have  not  only  seen  the  questions,  but  I 
heard  the  replies  today,  and  I generally  agree  except  to 
this  extent:  I think  Mr.  Forgan  is  wrong, — that  the 
Telephone  Company  could  borrow  at  a net  rate  of  9 per 
cent  today.  I think  it  would  cost  them  94.  I think  their 
securities  would  have  to  be  sold  to  the  public  at  7f 
or  8 per  cent.  That  is  a temporary  condition,  however, 
and  not  a permanent  condition.  We  are  offering  the 


164 


choicest  notes  today  at  74,  and  are  offering  notes  of 
very  strong  industrial  corporations  with  many  times 
quick  assets  as  well  as  permanent  assets  back  of  them,  on 
an  8 per  cent,  basis,  running  for  a year  and  a half  to 
two  years.  I believe  that  any  public  utility  operating 
at  the  present  time  could  not  sell  long-term  securities,  it 
would  have  to  be  for  short  time  borrowing,  and  neces- 
sarily very  expensive.  I do  not  believe  the  public  will 
take  their  long  securities  under  the  present  conditions. 
I think  the  main  difficulty  in  my  mind  as  to  the  financing 
of  these  public  utilities  is  the  attitude  of  the  public  mind. 

I am  going  to  lay  the  attitude  of  the  public  mind  to  sev- 
eral causes,  one  possibly  a general  antagonism  against 
public  utilities  and  monopolistic  organizations.  It  is  a 
natural  thing  for  an  individual  to  feel  that  the  big  cor- 
poration, which  has  a special  kind  of  franchise,  is  nat- 
urally opposed  to  him.  It  is  unfortunate,  but  that  is  sort 
of  ingrained  in  the  human  system.  Second,  the  greatest 
obstacle  to  the  whole  thing  is  politicians  who  make  po- 
litical capital  and  political  footballs  out  of  everything 
that  they  can  possibly  put  their  hands  on,  and  I lay 
the  charge  right  at  their  door  more  than  anything  else 
of  the  inability  to  get  money  required  to  give  service 
that  we  need. 

The  third  is  the  general  conditions  throughout  the 
country.  I think  we  need  a campaign  of  information  to 
the  public  so  that  they  will  understand  that  these  cor- 
porations really  belong ‘to  them  indirectly,  not  through 
public  ownership,  which  to  my  mind  would  be  a fizzle, 
but  through  a commission  such  as  I am  sitting  before 
now,  and  that  they  belong  to  them  to  see  that  they  get 
reasonable  rates.  On  the  other  hand,  the  utilities  have 
to  receive  proper  rates  to  get  a return  on  their  invest- 
ment, in  order  to  give  service. 


165 


I agree  with  Mr.  Piez,  that  we  have  to  have  good  serv- 
ice. I am  a director  in  one  or  two  industrial  concerns  and 
we  have  had  a great  shortage  of  labor  and  we  have  had 
great  difficulty  in  housing  our  labor  after  we  get  it  and 
also  great  difficulty  in  getting  labor,  and  the  tremendous 
difficulty  of  either  getting  adequate  telephone  service  or 
street  car  service,  and  in  some  cases  having  the  gas  mains 
expanded. 

I think  that  question  is  one  that  any  man  living  will 
answer  in  the  affirmative  if  he  studies  it  over.  I think 
that  covers  my  testimony. 

Mr.  Bangs:  You  referred  to  the  money  market  as 
temporary,  what  did  you  mean  by  that? 

A.  What  I meant  is  the  very  extreme  point  is  tempo- 
rary. I think  myself  we  are  going  to  be  in  high  rates 
for  a long  time  to  come.  What  Mr.  Porgan  said  about  a 
general  increase  in  values  has  gone  by. 

Our  Grovernment  in  one  way,  to  my  mind,  is  partly  re- 
sponsible for  it  unwittingly.  They  started  in  on  war  con- 
tracts, the  cost  plus  system,  and  they  told  their  con- 
tractors they  could  have  cost  plus  10  per  cent,  and  they 
immediately  began  competing  for  labor  and  material  and 
everything  else  on  that  basis  and  every  one  had  to  fol- 
low. That  is  one  of  the  outcomes  of  the  war.  We  have 
got  to  that  situation  where  it  is  very  hard  to  come  down 
from  our  pedestal.  What  I call  a temporary  situation 
is  over  five  years.  I think  it  will  be  five  years  before 
we  get  down  to  pre-war  rates,  but  I think  we  will  come 
down  next  year  to  somewhat  better  than  we  are  now. 

Chairman  Wilkerson:  If  this  Commission  were  to 
grant  advances  in  rates  to  all  of  these  utilities  which 
would  give  them  a return  comparable  with  the  re- 


166 


turns  being  received  in  industrial  lines,  do  you  think 
that  with  public  sentiment  the  way  it  is  now, 
securities  could  be  marketed!  A.  I think  they  could. 
Personally  I would  not  go  as  far  as  that;  I do  think  a 
public  utility  needs  a return  quite  as  great  as  that  in  the 
industrial  lines. 

Q.  What  I was  trying  to  get  at,  was  your  view  as  to 
the  effect  of  this  agitation  which  I suppose  we  will  al- 
ways have  with  us,  because  we  have  always  had  people 
preaching  confiscation.  A.  I think  it  will  be  very  un- 
popular. In  a speech  I made  a while  ago  on  which  you 
were  to  be  with  me  on  the  program,  a man  shouted  out, 
‘^How  about  this  six-cent  carfare!”  There  were  1,500 
people  present  there,  and  I had  him  brought  up  before 
me  on  the  stage  and  I asked  him  in  regard  to  the  wages 
he  was  getting  and  so  forth,  and  when  I got  through  he 
said,  ^ Wou  win,”  right  out  before  the  crowd,  no  question 
about  it.  He  was  getting  nearly  three  times  as  much 
wages  down  at  the  stock  yards  as  he  was  three  years 
ago,  and  he  was  hollering  about  a one-cent  increase 
in  the  fares.  He  is  human,  he  is  going  to  holler  at  every- 
thing. That  is  the  American  spirit.  But,  as  a matter  of 
fact,  if  you  put  out  the  reasons  fairly  and  tell  him  so 
that  he  will  understand,  he  will  go  along.  I don’t  want 
to  pay  any  increase  any  more  than  anyone  else  wants  to, 
but  we  have  to, — see  how  we  paid  the  income  tax. 

Commissioner  Lucey:  Do  I understand  you  to  say 
that  you  agree  with  Mr.  Piez  on  the  effect  on  the  city 
generally  oAving  to  the  shortage,  if  shortage  there  may  be, 
in  telephones,  street  cars,  lighting  and  so  forth! 

A.  I will  be  more  definite.’  I am  a director  in  a for- 
eign corporation  in  another  state,  a night’s  ride  from 
Chicago.  A year  ago  we  bought  a property  in  Chicago 


167 


and  paid  $170,000  for  it.  We  are  still  holding  it  and  pay- 
ing taxes.  We  have  not  moved  here,  hecanse,  on  a care- 
ful investigation,  the  committee  found  it  would  be  prac- 
tically impossible  to  get  the  working  men  out  there  be- 
cause the  street  car  men  have  not  improved  the  extension, 
and  these  various  other  problems,  so  that  we  are  in  doubt 
whether  we  will  ever  move  to  Chicago  or  not.  We  are 
offered  $100,000  profit  on  our  investment,  and  we  are 
thinking  maybe  we  will  sell  it  and  stay  where  we  are.  I 
offer  that  as  a concrete  illustration. 

Q.  Is  that  a typical  illustration  of  what  you  mean, 
of  what  you  have  in  your  mind  when  you  talk  about  the 
effect  on  business  and  the  confidence  in  general  through 
the  inadequate  service  of  these  utility  corporations? 
Would  you  cite  that  as  typical?  A.  I think  there  is  a 
great  deal  of  that.  There  is  a great  deal  of  business  that 
will  come  to  Chicago  and  certain  business  that  will  in- 
crease every  year  if  we  have  the  adequate  facilities. 

Q.  IsnT  it  a fact  that  the  shortage  of  these  facilities 
is  reflected  in  the  returns  of  not  only  the  particular  busi- 
ness such  as  your  own  or  which  might  be  affected  by 
insufficient  transportation  facilities,  but  doesn’t  it  affect 
the  grocer,  the  shoe  merchant,  the  clothing  merchant  and 
every  other  business  of  every  kind  and  character  in  the 
city?  A.  It  does. 

Q.  In  other  words,  the  public  in  general?  A.  Yes, 
sir ; it  is  so,  absolutely. 

Commissioner  Lucey:  I think  that  is  all. 


168 


Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Folds,  this  Federal  Securities  you  mentioned, 
is  that  a Government  institution?  A.  No,  sir. 

Q.  It  is  a private  concern  with  the  Federal  name? 
A.  It  is  a concern  started  by  the  young  men  associated 
with  me  in  the  Liberty  Loan.  I don’t  give  any  time  to 
that,  I just  mentioned  it. 

Q.  You  agree,  take  the  Surface  Lines  and  the  Elevated 
and  the  Telephone  Company,  particularly  the  Surface 
Lines  and  the  Elevated,  their  service  is  rather  inade- 
quate, isn’t  it,  at  this  time?  A.  It  is  not  adequate  to 
what  we  should  have. 

Q.  It  is  inadequate?  A.  Well,  it  is  inadequate  to  the 
needs  of  Chicago;  yes,  I think  it  is  as  adequate  as  any 
human  being  can  make  it  with  what  they  have  to  do  with. 

Q.  The  city  has  outgrown  the  system?  A.  Yes,  sir; 
it  has. 

Q.  You  don’t  have  to  use  it  much  yourself  ? A.  Ido. 

Q.  Well,  I thought  you  had  an  automobile.  A.  I have 
an  automobile,  but  I use  the  street  cars  too. 

Q.  You  realize  in  the  case  of  a monopoly  regulation 
is  proper,  don’t  you?  A.  Yes,  absolutely. 

Q.  And  it  is  a matter  in  which  the  people  are  con- 
cerned, you  agree  to  that?  A.  Yes,  sir. 

Q.  And  you  think  a campaign  of  education  should  be 
carried  on  for  the  people  to  make  them  realize  what  the 
situation  is,  do  you  not?  A.  I do. 

Q.  Is  there  any  objection  to  such  a campaign  being 
carried  on  from  your  viewpoint  as  an  investor,  provided 
the  statements  made  by  the  people  are  honestly  and  justly 
made?  A.  None. 


169 


Q.  Did  you  personally  participate  in  conducting  the 
adoption  of  the  ordinance  in  the  fall  of  1918?  A.  What 
ordinance  was  that? 

Q.  The  one  to  the  Street  Railways  Company?  A.  I 
favored  giving  them  an  ordinance. 

Q.  And  you  know  that  the  Surface  Lines  maintained 
a bureau  for  the  purpose  of  advocating  the  adoption  of 
that  ordinance?  A.  Yes,  sir. 

Q.  You  also  knew  that  the  grand  jury  made  a state- 
ment that  the  evidence  before  it  showed  that  the  ordi* 
nance  had  been  obtained  by  bribery,  didn’t  you?  A.  No. 

Q.  You  did  not  read  that?  A.  No. 

Chairman  Wilkerson:  Was  anybody  ever  prosecuted 
or  indicted  for  that? 

Mr.  Cleveland:  No. 

Chairman  Wilkerson:  What  then  has  the  statement 
made  before  the  grand  jury  to  do  when  intelligent  men 
in  this  community  do  not  either  indict  or  prosecute 
on  it?  The  time  has  come  when  these  insinuations  and 
innuendoes  on  these  things  should  be  stopped.  That  is 
my  own  view  about  it. 

Mr.  Cleveland : You  figured  it  was  all  right  and  proper 
for  the  representatives  of  the  company  to  go  before  the 
people  and  point  out  the  merits  of  that  proposition? 
A.  Absolutely. 

Q.  You  would  not  say  it  was  being  fair-minded, — 
there  was  no  reason  why  the  people  opposed  to  it  should 
not  go  out  and  point  out  their  objections?  A.  Not  if 
they  approached  it  with  the  idea  that  they  were  working 
for  the  people  of  Chicago,  and  not  working  for  some  po- 
litical conviction. 


170 


Q.  You  do  not  think  so?  A.  That  has  been  my  idea 
for  25  years,  both  Democratic  and  Republican,  absolutely. 
I have  no  use  for  it  and  I am  getting  sick  of  it. 

Q.  You  are  opposed  to  men  in  public  life?  A.  No, 
sir;  I am  not  opposed  to  men  in  public  life. 

Q.  Making  an  issue  on  the  street  oar  question?  A.  I 
am  opposed  to  men  in  public  life  lowering  themselves  and 
their  moral  standards  to  make  use  of  things  which  as  a 
business  proposition  they  would  throw  out  of  their  office, 
but  in  public  life  they  take  up. 

Q.  Suppose  they  tell  the  truth  about  those  things? 
A.  I do  not  believe  they  do.  I do  not  believe  there  is  a 
man  in  the  city  hall  who  has  told  the  truth  about  this  in 
20  years. 

Q.  It  is  possible  some  of  them  do  not  believe  you  tell 
the  truth?  A.  Well,  let  them  come  around  and  tell  me 
that  to  my  face. 

Q.  They  might  do  that.  A.  All  right. 

Q.  The  question  about  that  is,  it  is  a matter  of  public 
consideration,  isn’t  it?  A.  Yes,  sir. 

Q.  And  as  long  as  it  is  a matter  of  public  considera- 
tion, politics  being  in  the  case  of  a man — a politician 
being  a man  who  has  in  mind  the  serving  of  the  people, 
which  is  a correct  definition  of  it — A.  He  has  it  in 
someone  else ’s  mind,  not  in  his  own. 

Q.  I know,  that  you  great  financiers  laugh  at  that,  you 
are  opposed  to  a man  that  does  that,  that  is  the  definition, 
you  probably  had  not  read  the  dictionary  on  it.  That  is 
what  a politician  in  the  proper  sense  is.  If  that  is  what 
a politician  is,  a man  who  has  in  mind  the  service  of  the 
people,  do  you  have  objection  to  that  kind  of  a politician? 
A.  Yes,  I do  not  think  those  questions  should  be  po- 
litical at  all. 


171 


Q.  If  you  were  to  go  before  the  people,  they  are 
necessarily  political,  aren’t  they?  A.  I do  not  think  they 
need  to  go  before  the  people. 

Q.  I thought  that  was  the  truth?  A.  I think  the 
people  could  develop  and  appoint  men  such  as  this  Com- 
mission and  others,  that  will  deal  with  these  questions 
better  than  a lot  of  uneducated  voters  and  politicians 
could. 

Q.  It  is  your  idea  that  this  ordinance  of  1918  which 
was  referred  to  the  people  and  defeated  by  the  people, 
would  be  better  passed  upon  by  some  business  men  who 
are  in  favor  of  it?  A.  Not  business  men;  I am  willing 
that  every  side  should  have  a chance. 

Q.  But  not  submitted  to  the  people?  A.  Yes,  sub- 
mitted to  the  people. 

Q.  There  should  be  some  submission  to  the  people? 
A.  Yes. 

Q.  The  only  tribunal  that  can  have  it  considered  is 
before  the  people?  A.  I do  not  consider  politics  in  the 
sense  we  are  talking  about  it. 

Q.  The  only  ditference  between  you  and  me  is  that 
we  do  not  use  politics  in  the  same  sense.  A.  I hope 
not. 

Q.  Do  you  consider  that  the  value  of  the  securities 
of  the  public  utilities  depends  at  all  on  the  question  of 
their  ability  to  make  a valid  and  binding  contract  that 
they  can  live  up  to?  A.  Repeat  that. 

Mr.  Cleveland:  Read  it. 

(Question  read.) 

Chairman  Wilkerson:  Answer  it  if  you  can. 

A.  I think  that  is  one  thing  to  be  considered.  You 


172 


are  only  stating  part  of  the  question ; you  are  not  giving 
the  whole  thing;  I think  of  course  for  every  side  of -the 
question,  either  party  has  to  be  able  to  live  up  to  its 
contract  or  show  good  faith  that  it  will  live  up  to  its  con- 
tract, or  else  it  will  affect  the  value  of  the  securities — 

Q.  You  have  handled  a great  many  of  these  Surface 
Lines  securities?  A.  Not  in  my  own  business;  we  do 
not  handle  them  at  all. 

Q.  You  do  not  handle  them  at  all?  A.  I bought  them 
in  other  ways,  though,  that  I am  connected  with. 

Q.  Assuming  that  some  commission  or  the  city  council 
had  undertaken  to  reduce  the  fares  provided  in  the  ordi- 
nances below  what  they  were  described  to  be  after  the 
bonds  were  issued  on  them,  would  you  say  that  it  would 
be  improper  politics  to  go  before  the  people  and  urge  on 
the  people  that  that  was  an  unfair  and  unjust  thing  to 
do?  A.  No. 

Q.  Would  you,  Mr.  Folds?  A.  I do  not  think  it  would 
be  done,  though. 

Q.  No,  just  raise  them,  that  is  your  only  idea,  is  it? 
A.  No,  it  is  not. 

Q.  Now,  isn’t  it  a fact,  Mr.  Folds,  that  the  stability 
of  an  investment  is  the  thing  of  prime  necessity  in  order 
to  make  it  attractive  to  the  public?  A.  The  stability 
of  the  investment  and  the  earning  power,  more  partic- 
ularly the  earning  power. 

Q.  Well,  you  have  got  to  have  security  behind  it,  don’t 
you,  so  that  they  think  they  are  at  least  sure  to  get  back 
the  principal?  A.  Yes,  but  I would  not  loan  one  thou- 
sand dollars  on  a building  if  I thought  it  was  going  to 
be  empty  for  the  next  five  years,  because  I would  get 
no  return  on  my  investment,  even  though  it  was  worth 
one  million  dollars. 


173 


Q.  If  the  building  was  worth  one  million  dollars,  you 
would  not  loan  ten  million  on  it,  even  if  you  got  a rate  of 
return  of  10  per  cent.,  would  you!  A.  No,  sir;  I would 
not. 

Q.  Now,  you  have  decided  in  advance  that  public 
ownership  is  going  to  be  a fizzle?  A.  I feel  satisfied. 

Q.  Have  you  considered  any  of  the  systems  where 
there  is  public  ownership  prevailing?  A.  Yes,  and  I 
think  it  would  be  a very  difficult  matter  to  point  one  out 
that  would  not  be  run  better  by  private  management,  in- 
cluding water  works  and  other  things. 

Q.  Your  idea  is  that  water  works,  gas  plants,  great 
and  small,  should  be  private  ownerships?  A.  That  is 
my  private  opinion. 

Q.  Yes.  A.  Under  public  ownership  I think  they 
should  be  carefully  regulated. 

Q.  Isn’t  it  true,  however,  that  from  the  beginning 
of  the  government  of  this  state,  public  ownership  has 
prevailed  with  reference  to  certain  things  more  or  less? 
A.  Yes,  sir. 

Q.  Sometimes  it  has  been  water  works,  sometimes  gas 
works,  sometimes  electric  lights,  that  is  true,  isn’t  it? 
A.  Yes,  sir. 

Q.  The  question  of  public  ownership  is  not  a matter 
that  depends  on  any  universal  principle  but  has  to  be 
taken  up  in  relation  to  the  particular  things,  isn’t  that 
true?  A.  Yes,  sir. 

Q.  Isn’t  it  a fact,  that  on  the  market  today  the  bonds 
issued  by  municipalities  for  public  utilities  operated  by 
them  will  rate  higher  than  the  bonds  issued  by  private 
concerns  operating  public  utilities?  A.  Yes,  sir,  because 
by  a very  unjust  law  we  allow  them  to  be  tax  exempt, 


174 


under  the  present  tax  law.  Of  course,  it  naturally  follows 
that  those  things  are  higher.  These  things  are  on  a level 
when  it  comes  down  to  a man,  at  a desk,  with  a pencil, 
who  knows  how  to  figure. 

Q.  Can  there  he  any  doubt,  suppose  the  work  is  hon- 
estly done,  that  a public  utility  owned  and  operated  by 
public  ownership  is  the  safe  investment?  A.  A public 
utility  owned  and  operated  through — 

Q.  Through  public  ownership,  if  it  is  dealt  with  hon- 
estly? A.  If  the  community  is  a prosperous  one  and  a 
populous  one  of  course  it  is, — you  would  not  want  me  to 
say  that  the  City  of  Chicago  bonds  are  no  good;  that 
would  be  foolish,  but  the  City  of  Chicago  is  going  to  get 
to  tl;ie  point  where  their  bonds  will  he  just  like  the  Chi- 
cago Railways  Company. 

Q.  Well,  you  are  indulging  in  prophesies?  A.  If  the 
City  of  Chicago  should  go  to  the  Street  Railways  Com- 
pany and  want  to  borrow  money  on  the  bonds  they  would 
have  to  pay  9 per  cent. 

Q.  Well,  I agree  with  you  on  that  assumption?  A. 
Taking  it  over  on  the  city  halPs  valuation. 

Q.  No,  we  donT  want  to  take  any  valuation,  we  will 
build  up  our  new  system.  A.  You  get  it  out  of  the  tax 
payers,  you  have  twenty  or  twenty-five  million  dollars 
of  our  money. 

Q.  That  is  your  money?  A.  It  is  the  public’s. 

Q.  Who  does  that  belong  to,  the  public  or  the  street 
car  company?  A.  I think  it  belongs  to  the  public. 

Q.  Paid  under  the  contract?  A.  I forget,  I thought 
that  was  paid  out  for  a subway  system  as  we  needed  it. 

Q.  For  what?  A. . To  be  paid  out  for  a subway  sys- 
tem as  we  needed  it. 


175 


Q.  For  whom?  A.  The  politicians  don’t  want  to  go 
into  it. 

Q.  For  whom?  A.  For  the  city,  but  leased  to  the 
street  railway  company. 

*Q.  To  be  used  exclusively  by  the  Street  Railway  Com- 
pany? A.  Yes. 

Q.  That  is  your  idea?  A.  Yes,  they  paid  the  money. 

Q.  You  listened  to  Mr.  Forgan  and  you  heard  him 
make  some  statements  on  cross-examination,  aside  from 
what  corrections  you  made,  do  you  substantially  concur 
in  what  he  says?  A.  Yes,  sir. 

Mr.  Cleveland:  That  is  all. 

Mr.  Ringer:  How  is  the  telephone  service? 

A.  About  as  fair  and  about  as  poor  as  in  most  of  the 
cities,  I think  it  is  better  than  in  New  York. 

Q.  Satisfactory?  A.  No,  I would  not  say  it  is  all  we 
want,  but  it  is  fair. 

Q.  You  think  the  service  would  be  improved  if  a higher 
rate  of  wages  would  be  paid  to  the  employes?  A.  I am 
not  a telephone  administrator,  but  I imagine  that  would 
be — they  would  have  more  ease  in  getting  employes.  I 
know  what  we  are  paying  an  operator  on  our  switchboard, 
and  I know  we  are  paying  a great  deal  higher  salary 
than  the  Telephone  Company  can  pay,  but  if  we  lose  the 
operator  tomorrow,  we  can  send  down  to  Washington 
street  and  get  one  of  their  good  girls.  Nobody  limits  us 
to  what  we  are  paying,  we  can  pay  $125  a month  if  we 
want  to. 

Q.  You  think  at  present  we  have  reached  the  peak 
prices  on  material  and  labor?  A.  I do. 

Q.  Don’t  you  think  any  valuation  based  on  these 


176 


peak  prices,  with  the  idea  of  using  the  peak  prices  for  per- 
manent valuations  is  unfair!  A.  I agree  with  Mr. 
Wheeler  on  that,  you  have  to  consider  these  prices  if  you 
are  going  to  get  anything,  and  you  have  to  also  give  a 
small  margin  to  write  off  these  things  as  we  go  down. 
My  idea  of  the  whole  affair  is  that  the  prices  should  ad- 
vance and  recede  as  things  permit.  I do  not  think  tele- 
phone rates  should  go  up  and  stay  up  for  all  time,  but 
if  the  time  ever  comes  when  they  may  go  down, — I doubt 
if  that  -time  will  ever  come  when  they  may  go  down, — I 
think  they  should.  I think  the  same  with  regard  to  street 
car  rates  and  gas  rates.  You  have  to  meet  the  situation. 

Q.  You  are  in  favor  of  everything  going  up!  A. 
No,  I deprecate  it  very  much.  I can  show  you  a letter 
that  I sent  out  to  my  customers  on  that. 

Q.  You  are  in  favor  of  everything  going  up,  including 
the  street  car  company!  A.  I think  they  have  to  right 
now,  because  when  we  close  all  the  shops  and  factories  and 
the  people  stand  in  the  bread  lines  and  the  United  Chari- 
ties, of  which  I am  president,  has  its  back  broken,  I think 
at  that  time  the  public  utilities’  wages  will  probably  re- 
duce, and  then  I will  be  on  the  other  side  of  the  fence,  but 
right  now,  I think  they  have  to  have  it  to  give  service. 

Q.  What  effect  would  it  have  on  this  investment  stand- 
point if  rates  should  go  up  this  year  and  down  the  next 
year,  or  the  Lord  knows  where  they  will  go!  A.  I am 
glad  you  asked  that.  If  I can  get  before  this  Commission 
and  show  the  public  that  the  attitude  of  these  people  is, 
under  a proper  valuation  of  their  property  and  a fair 
conduct  of  their  business,  only  to  get  a fair  return  for 
their  capital,  whether  up  now  or  down  later  or  still  fur- 
ther up,  according  to  the  general  situation,  then  the  public 
will  come  in  and  invest  in  those  securities. 


177 


Q.  I suppose  you  have  to  take  into  consideration  the 
exigencies  of  human  affairs,  which  may  result  in  a change 
of  the  personnel  of  the  Commission!  A.  That  is  true, 
and,  therefore,  you  have  to  give  them  something  for  a 
margin. 

Q.  Give  them  plenty  of  margin  and  credit  it  against 
expenses!  A.  Not  plenty,  just  enough  to  guard  against 
the  future. 

Commissioner  Shaw:  Is  business  being  injured  at  the 
present  time  by  reason  of  the  service  being  rendered  by 
the  carriers,  the  railroads!  A.  Very  much. 

Q.  If  there  was  the  same  breakdown,  as  you  may  call 
it,  by  the  utilities,  such  as  the  gas,  telephone  and  street 
car  company  and  so  forth,  would  the  effect  on  business 
be  the  same ! A.  It  would  be  worse  because  it  would  be 
more  direct,  very  definite,  and  a more  local  proposition. 
The  railroad  situation  has  a great  deal  to  do  in  the  pres- 
ent tightness  of  money  rates,  millions  of  dollars  of  pro- 
duce are  tied  up  in  freight  yards  all  over  the  country 
that  they  cannot  get  their  money  out  of. 

Commissioner  Shaw:  That  is  all. 

Chairman  Wilkerson  : Is  that  all! 

Mr.  Dunbaugh : That  is  all. 

Chairman  Wilkerson:  Do  you  want  to  make  a state- 
ment, Mr.  Eichberg! 

Mr.  Eichberg:  Yes,  I wish  to  make  a statement. 

Mr.  Cleveland:  It  is  getting  late,  why  not  adjourn 
until  2 o’clock,  now. 

Chairman  Wilkerson : All  right,  we  will  adjourn  until 
2 o’clock  this  afternoon. 

Adjourned  until  2 p.  m. 


178 


Wednesday,  May  12,  1920,  2 o’clock  p.  m. 

Hearing  met  pursuant  to  adjournment. 

Present:  Same  as  before. 

Commissioners  Wilkerson  (presiding),  Lucey, 
Dempcy,  Shaw  and  Funk. 

Commissioner  Wilkerson : You  may  proceed  with  the 
next  witness. 

Mr.  Eichberg:  I have  not  been  sworn,  Mr.  Commis- 
sioner. I am  going  to  make  just  an  informal  statement. 
That  is  my  understanding. 

Commissioner  Wilkerson : Do  you  want  to  make  it  un- 
der oath? 

Mr.  Eichberg:  I am  perfectly  willing  to.  I do  not 
know  there  is  any  distinction. 

(Whereupon  Mr.  Eichberg  was  sworn  by  Commis- 
sioner Wilkerson.) 

Donald  E.  Eichberg,  called  as  a witness  herein,  having 

been  first  duly  sworn,  testified  as  follows : 

My  reason  for  asking  an  opportunity  to  present  this 
statement  is,  in  the  first  place,  because  indiscriminate 
condemnation  of  all  public  representatives  who  oppose 
the  wishes  of  public  utilities  is  as  unfair  in  my  judgment, 
and  I might  say  ‘^demogogic”  as  indiscriminate  abuse 
of  all  public  utility  operators,  because  of  the  scandalous 
conduct  of  some  of  them.  Therefore,  I should  like  to  pre- 
sent something  of  the  point  of  view  of  the  representative 
of  the  public. 

In  the  second  place,  I would  like  to  call  attention  to 
the  fact  that  the  utilities  themselves  here  have  been,  or 


179 


are  often,  the  cause  of  discrediting  these  public  officials 
who  try  to  be  fair  with  them. 

I can  cite  a personal  instance  in  which  I risked  and 
received  considerable  public  criticism  for  negotiating  an 
agreement  with  a public  utility  whereby  the  quality  of 
the  service  was  lowered,  in  exchange  for  lowering  rates ; 
and  as  the  Commission  will  recollect,  that  utility  at- 
tempted before  this  Commission,  to  break  that  agreement 
and  to  obtain  higher  rates  within  five  months  of  the 
signing  of  it,  which  the  Commission  refused  to  allow. 

Before  proceeding  to  a more  formal  statement  I also 
wish  to  state  what  I have  to  say  reflects  in  no  way  the 
individual  views  of  the  other  representatives  of  the  city 
who  are  present  for  the  city  administration,  and  they 
are  not  to  be  charged  with  anything  I may  say.  These 
are  my  views.  They  may  differ  radically  with  them,  or 
they  may  be  in  some  agreement  with  them,  but  they  have 
not  participated  in  the  preparation  of  this  statement. 

As  special  counsel  for  the  City  of  Chicago  in  gas  mat- 
ters, I desire  to  make  a statement  upon  the  matter  of 
financing  extensions  in  public  utility  service  which  is  now 
before  the  Commission.  This  statement  I base  on  a study 
of  public  utility  problems  extending  over  approximately 
20  years,  including  about  16  years  of  active  practice  as 
a lawyer  largely  concerned  with  public  service  questions. 
The  public  interest  in  behalf  of  which  this  appearance 
is  made  is  found  not  only  in  the  customers  of  public  serv- 
ice companies,  but  also  in  salaried  workers  and  wage 
earners  whose  profit  from  their  labor  is  diminished  by  in- 
creasing interest  rates  and  in  the  present  investors  in 
public  utility  securities  whose  available  capital  is  dimin- 
ished by  the  same  cause. 

There  are  certain  fundamental  considerations  of  imme- 


180 


diate  as  well  as  ultimate  importance  which  should  be 
presented  to  the  Commission.  The  responsibility  for 
maintaining  the  financial  integrity  of  public  utilities 
should  not  be  imposed  entirely  upon  their  customers 
until  at  least  it  has  been  determined  whether  the  owners 
and  operators  of  these  utilities  have  fully  met  their  pri- 
mary responsibility.  Public  officials  should  not  be  asked 
to  give  legal  sanction  to  interest  charges  prescribed  as 
usurious  and  made  illegal  until  at  least  they  have  con- 
sidered the  effect  upon  the  community  welfare  which  may 
result  from  such  action.  This  Commission  has  been  asked 
to  accept  high  interest  rates  as  the  result  of  the  opera- 
tion of  natural  economic  laws.  The  Commission  should 
at  least  consider  whether  these  rates  partially  result  from 
artificial  laws  put  in  force  through  concentrated  control 
of  credit  and  industry,  strengthened  through  a world 
war. 

The  Commission  is  asked  to  increase  heavily  the  cost 
to  the  public  of  private  ownership  of  public  utilities,  as  a 
measure  for  preventing  that  public  ownership  which  may 
result  from  a further  demonstration  of  incapacity  or  lack 
of  responsibility  in  private  management.  Should  not 
the  Commission  consider  whether  the  proposed  relief  will 
accomplish  this  purpose,  or,  may  simply  result  in  increas- 
ing enormously  the  capital  investment  and  the  capital 
charges  to  be  assumed  by  the  government  if  forced  event- 
ually to  take  over  this  public  service  to  protect  the  gen- 
eral welfare  ? This  question  is  not  asked  by  a convinced 
proponent  of  public  operation  of  public  utilities.  I ask 
it  as  one  somewhat  fearful  of  that  consequence.  But 
is  it  not  high  time  for  conservative  capitalists  to  decide 
whether  they  will  use  every  effort  to  support  private  own- 
ership of  public  utilities,  or  whether  they  are  ready  to 


181 


accept  the  alternative  of  governmental  control!  The  half 
way  measures  now  advocated  before  this  Commission  are 
inadequate  for  any  permanent  solution.  Mr.  Hulbert, 
president  of  several  banks,  stated  that  three  or  four  year 
notes  were  not  permanent  financing.  He  said,  ^Ht  is 
very  temporary  and  very  unsound.’^  Mr.  Corey,  vice- 
president  of  the  Harris  Trust  & Savings  Bank  said,  ^‘The 
corporation  which  must  in  order  to  pay  for  the  develop- 
ment of  its  business,  the  corporation  that  must  borrow  all 
the  money  that  it  needs  for  this  purpose  year  in  and  year 
out,  is  destined  for  the  financial  grave  yard,  absolutely. 
Under  these  circumstances  any  constructive  action  on 
the  part  of  this  Commission  must  involve  considerations 
of  the  underlying  causes  of  present  utility  diseases  and 
adoption  of  a policy  which  will  work  toward  permanent 
improvement.  It  is  my  purpose  to  indicate  that  the  sug- 
gestions offered  igiiore  certain  major  causes  and  that  the 
remedies  proposed  are  likely  to  aggravate  the  malady 
they  are  offered  to  cure. 

First,  what  are  the  causes  of  present  public  utility  diffi- 
culties ! Political  agitation  was  the  principal  explanation 
offered  by  the  previous  witnesses.  Of  course,  these  gen- 
tlemen themselves  know,  or  ought  to  know,  that  polit- 
ical agitation  is  an  effect  and  rarely  the  cause  of  any- 
thing. Politics  was  a football  of  the  public  utilities  long 
before  the  utilities  became  a football  of  politics.  The 
struggle  to  drive  the  public  utilities  out  of  politics  has 
raged  in  every  state  and  every  large  city  in  the  United 
States.  The  original  public  utility  promoters  went  into 
politics  to  get  wealthy  and  their  heirs  remained  in  poli- 
tics to  protect  the  spoils  of  victory. 

The  operators  now  complain  of  lack  of  public  confi- 
dence in  the  utilities.  What  is  there  in  the  record  of  the 


182 


utilities  to  promote  public  confidence?  Does  history  re- 
cord that  the  public  would  have  benefited  by  placing  more 
confidence  in  Mr.  Yerkes  or  Mr.  Harriman?  The  record 
of  the  public  utilities  as  public  servants  in  any  community, 
from  Maine  to  California,  at  any  time  during  the  last  50 
years,  is  not  such  as  would  naturally  inspire  public  confi- 
dence in  the  efficiency  and  economy  of  their  service  or  in 
the  value  of  their  securities.  But  the  public  is  told  that 
the  character  of  the  operators  has  changed,  that  their 
main  motive  now  is  to  be  faithful  public  servants.  Do 
the  utility  operators  ever  realize  how  the  personal  pros- 
perity of  many  past  and  present  utility  promoters  clouds 
this  claim  in  the  mind  of  the  average  individual?  It  is 
difficult  to  find  a prominent  public  utility  which  is  not 
the  source  of  some  conspicuous  fortune  and  the  public 
curiously  enough  assumes  that  these  fortunes  have  been 
made  out  of  the  public. 

Furthermore,  have  not  the  customers  of  public  utilities 
as  well  as  their  security  holders  in  many  localities,  and 
many  times,  observed  the  operators  and  their  friends  buy- 
ing and  selling  utility  securities  and  profiting  heavily 
by  inside  information,  and  also  by  favorable  contracts 
with  friendly  interests,  at  the  expense  of  the  security 
holders  and  the  general  public?  Under  these  circum- 
stances is  it  surprising  that  protestations  of  high  aims 
and  public  spirited  purposes  even  by  blameless  operators 
fall  upon  deaf  ears? 

The  first  step  to  take  the  public  utilities  out  of  poli- 
tics is  for  the  public  utilities  to  get  out  of  politics,  and 
if  they  do  not  dare  to  take  that  step  it  may  be  suggested 
that  they  might  get  out  of  the  lowest  grade  of  politics 
and  operate  only  on  the  higher  levels.  The  first  step  to 
encourage  public  confidence  in  the  virtue  of  public  utility 


183 


operators  is  for  the  stronger  operators  to  persuade  the 
weaker  brethren  to  more  frequent  exhibitions  of  those 
elementary  virtues  whereby  men  restrain  themselves 
from  making  private  profits  out  of  breaches  of  public 
trust.  I make  these  statements  in  detail  merely  to  point 
out  that  public  aversion  to  utilities  is  not  anything  which 
is  created  or  resulted  apparently  out  of  political  agita- 
tion. 

Another  reason  for  lack  of  public  confidence  in  utility 
securities  is  stated  to  be  the  present  low  market  value 
of  these  securities  and  the  principal  cause  of  these  low 
values  has  been  asserted  to  be  regulation  by  public  util- 
ity commissions.  The  Commission  will  recognize  that  up 
to  the  present  time  commission  regulation  has  had  little 
depressing  effect  on  the  market  value  of  securities  which 
were  essentially  sound,  but  the  rising  interest  rate,  en- 
couraged by  the  same  gentlemen  who  appear  as  wit- 
nesses, has  depressed  the  value  of  existing  sound  securi- 
ties. These  gentlemen  now  propose  that  the  Commission 
sanction  a much  higher  rate  for  public  utility  securities 
and  thereby  further  depress  present  values.  Then  they 
will  be  able  to  prove  their  present  proposition  that  com- 
mission regulation  has  undermined  the  investors’  confi- 
dence in  even  sound  public  utility  securities. 

Has  commission  regulation  anything  to  do  with  the 
fact  that  Commonwealth  Edison  five  per  cent,  bonds  have 
been  selling  below  801  Not  yet.  But  if  this  Commission 
'establishes  a seven  per  cent,  rate  for  first  class  utility 
bonds  every  Edison  company  bondholder  may  credit  the 
Commission  with  permanently  reducing  the  value  of  his 
investment.  Yet,  Mr.  Insull,  who  is  presumably  inter- 
ested in  protecting  those  who  have  already  invested  in 
these  bonds,  comes  before  the  Commission  and  advocate? 


184 


a policy  of  stabilizing  a high  interest  rate  which  will 
cause  further  loss  to  his  already  unhappy  bondholders. 

There  are  many  instances  where  commission  regula- 
tion has  denied  to  the  victims  of  financial  misrepresenta- 
tions the  right  to  squeeze  the  public  to  make  up  for  their 
bad  judgment  in  buying  securities  representing  an  invest- 
ment of  hope  instead  of  capital.  The  Blue  Sky  securi- 
ties issued  by  public  utilities  have  suffered  from  commis- 
sion regulation,  but  it  will  be  difficult  to  find  an  instance 
where  a public  utility  commission  has  denied  a fair  re- 
turn upon  capital  actually  and  prudently  invested  in  a 
public  utility  enterprise  after  competent  evidence  of  such 
investment  has  been  presented  to  the  commission. 

The  real  issue  which  seems  to  be  presented  to  the  pub- 
lic utility  commission  today  is : Is  it  in  the  public  inter- 
est to  impose  on  the  public  the  burden  of  making  good 
the  shameful  exploitation  of  public  utilities  in  the  past 
and  to  start  afresh  on  a basis  which  will  guarantee  the 
soundness  of  existing  securities  and  those  issued  in  the 
future*?  There  are  two  parts  to  the  program  put  forth 
to  accomplish  this  purpose.  One  is  the  temporary  re- 
lief afforded  by  allowing  high  interest  rates.  The  sec- 
ond, is  the  permanent  relief  afforded  by  approving  the 
transformation  of  lead  in  public  utility  capitalization  into 
gold  through  the  use  of  so-called  ‘ ‘ reproduction  values.  ’ ’ 

Taking  up  the  first  part  of  the  program  I suggest  an 
inquiry  into  the  effect  upon  the  community  of  stabiliz- 
ing a high  interest  rate  through  commission  action.  It 
seemed  to  be  the  belief  of  the  witnesses  appearing  before 
the  Commission  that  the  general  conditions  have  made 
a high  interest  rate  logical,  natural  and  just,  and  the 
commission  had  no  option  except  to  accept  this  fact  and 
give  it  official  approval.  It  was  stated  that  capital  was 


185 


scarce,  that  credit  was  over  extended,  and  that  therefore, 
investors  could  demand  and  would  demand  a higher  rate, 
and  that  their  demands  must  be  met  or  else  no  further 
capital  would  flow  into  the  public  utilities.  The  Com- 
mission was  thus  faced  with  a demand  from  representa- 
tives of  capital  for  a higher  wage,  backed  by  the  assur- 
ance that  unless  a higher  wage  is  allowed,  public  utility 
service  will  be  crippled  by  a refusal  of  further  capital 
contributions.  This  demand  must  sound  to  the  Commis- 
sion as  somewhat  similar  to  the  demand  which  has  come 
from  time  to  time  from  representatives  of  labor  asking 
for  a higher  wage  and  backed  by  the  assurance  that  un- 
less a higher  wage  is  allowed,  public  utility  service  would 
be  crippled  by  a refusal  of  further  labor  contributions. 
A distinction  between  the  two  demands  was  indicated  by 
the  statement  of  certain  bankers  that  they  appeared  not 
as  representatives  of  investors  but  merely  as  intermedi- 
aries between  the  investors  and  the  public  utility  oper- 
ators, and,  of  course,  the  Commission  is  informed  that  the 
investors  are  not  organized  into  national  or  international 
unions  but  only  partially  organized  into  local  unions  of 
stockholders.  Therefore,  when  the  public  utilities  are 
threatened  with  disaster  from  a capital  strike  it  is  diffi- 
cult to  find  any  one  to  punish  or  to  lecture  for  failure 
to  accept  the  responsibility  for  keeping  the  public  ser- 
vice in  continual  operation.  Thus  a capital  strike  is  in 
many  ways  more  difficult  to  deal  with  than  a labor  strike, 
but  it  should  be  recognized  that  the  demands  are  similar. 
It  should  also  be  recognized  that,  so  far  as  credit  is  con- 
trolled through  organizations  of  bankers  and  investment 
bankers,  there  is  a grave  responsibility  on  those  who  ad- 
mittedly exercise  a considerable  control  over  credit  to 
exert  their  power  to  assist  in  the  financing  of  public  util- 


186 


ities ; and  that  they  are  subject  to  severe  criticism  when 
they  fail  to  exhibit  a feeling  of  responsibility. 

It  might  be  pointed  out  that  savings  deposits  still 
draw  the  three  per  cent,  interest  that  they  drew  many 
years  ago  and  that  certificates  of  deposit  draw  two  and 
three  cent,  as  before.  It  appears  therefore,  that 
there  is  sufficient  understanding  between  the  banking  in- 
terests to  prevent  any  competitive  increase  in  the  rate  of 
interests  on  savings  deposits  although  their  representa- 
tives will  assure  the  Commission  that  they  are  unable 
to  prevent  competitive  increases  of  interest  on  sound 
public  utility  bonds.  One  of  the  bankers  appearing  as 
a witness,  stated  that,  ^‘public  utilities  are  in  the  market 
competing  with  industrial  concerns  that  are  making  30 
and  40  per  cent,  on  their  capital  and  who  can  show  such 
earnings  for  years  back.’’  But  none  of  the  bankers  tes- 
tified that  they  had  made  any  exceptional  effort  to  con- 
vince investors  that  a certain  proportion  of  investments 
must  be  made  in  public  utilities  or  else  investments  in 
industrials  will  suffer,  as  many  of  them  are  now  suffering, 
from  the  lack  of  public  utility  facilities. 

Some  of  the  witnesses  appearing  before  this  Commis- 
sion, all  of  whom  were  men  of  high  standing  and  excep- 
tional ability,  exhibited  curious  ideas  of  political  econ- 
omy, which  is  one  of  the  reasons  I suggested  the  desirabil- 
ity of  further  evidence,  indicating  that  perhaps  one  of 
the  difficulties  in  the  present  situation  is  the  lack  of  an 
appreciation  of  the  long  distance  effects  of  policies  ac- 
cepted for  the  moment  as  desirable  because  profitable. 
A leading  public  utility  operator  stated:  ^‘Increasing 
the  rate  from  what  it  used  to  be,  five  or  six  per  cent,  to 
nine  per  cent,  is  really  increasing  the  wages  of  capital, 
which  like  the  wages  of  labor  were  bound  to  go  up.”  An 


187 


eminent  banker  following  this  witness  referring  approv- 
ingly to  his  testimony  said,  ‘‘the  price  of  money  is  higher 
than  it  was.  It  has  gone  up  with  everything  else  and 
necessarily  so.  ’ ’ It  seems  that  a primer  on  political  econ- 
omy might  convey  useful  information  to  these  witnesses. 
The  idea  that  money  should  command  a higher  interest 
rate  because  it  is  cheaper  is  somewhat  amazing.  A wage 
earner  may  demand  more  money  because  cheaper  money 
gives  him  less  actual  return  for  his  labor,  but  if  money 
demands  more  money  because  it  is  itself  cheaper,  it  is,  in 
fact,  simply  asking  for  a larger  profit  than  before. 

That  is  the  real  effect  of  the  demand  for  higher  inter- 
est rates.  Interest  on  capital  is  produced  by  surplus 
labor.  There  is  no  value  in  property  save  that  which  is 
given  to  it  from  day  to  day  by  the  labor  of  the  day.  If 
capital  increases  its  demand  from  6 to  10  per  cent,  it  is 
requiring  66  per  cent,  more  surplus  labor  to  be  devoted 
to  meeting  capital  charges.  It  should  be  recognized  that 
this  is  an  enormous  demand  to  place  upon  labor.  It 
should  also  be  recognized  that  if  the  productivity  of 
labor  rises  through  the  use  of  machinery,  so  that  labor 
can  meet  this  demand,  the  result  is  that  the  benefits  of 
improved  methods  of  production  are  disproportionately 
absorbed  by  the  contributors  of  capital;  that  labor  is 
denied  its  fair  proportion  of  these  benefits  and  that  the 
dissatisfaction  of  labor  with  this  result  is  deep,  inevitable 
and  of  dangerous  consequences. 

The  purpose  of  suggesting  these  considerations  to  the 
Commission  is  to  point  out  that  an  increasing  interest 
rate  is  a bad  tendency  from  any  broad  point  of  view  and 
one  which  the  Commission,  as  a body  of  public  officials, 
should  hesitate  to  accelerate.  Of  course,  there  is  a larger 
margin  of  profit  for  banking  interests  in  a higher  interest 


188 


rate  and  the  public  utility  operators,  who  need  continually 
the  aid  and  support  of  these  interests,  cannot  be  expected 
to  testify  in  opposition  to  their  views.  But  the  Public 
Utilities  Commission  of  the  State  of  Illinois  may  well 
hesitate  to  decide  an  issue  of  this  importance  upon  evi- 
dence presented  only  by  interested  parties  on  one  side 
of  the  case.  Such  statements  as  I am  making  can  have 
but  little  weight  against  the  authority  and  prestige  of 
previous  witnesses  but  I hope  that  by  these  statements 
I may  be  able  to  indicate  the  desirability  of  action  by 
the  Commission  calling  for  the  presentation  of  evidence 
from  authoritative  representatives  of  the  public,  from 
men  of  vision  in  the  universities  and  from  men  repre- 
senting the  productive  labor  which  is  called  upon  to  pay 
these  interest  charges.  Certainly  the  record  should  not 
be  limited  to  witnesses  representing  special  interests  and 
special  pleaders  in  their  behalf. 

In  order  to  assure  the  Commission  that  I do  not  ap- 
pear merely  as  a critic  of  the  work  of  others,  but  have 
certain  constructive  suggestions  to  make  regarding  the 
handling  of  the  present  problem  I ask  the  indulgence  of 
a little  more  time  to  present  a suggestion  in  regard  to  the 
second  part  of  the  present  program,  which  is  the  revalua- 
tion of  public  utilities  with  the  design  of  re-inflating 
present  deflated  securities  which  do  not  represent  actual 
investment.  In  order  to  restablish  the  stability  of  the 
public  utility  securities  they  must  be  placed  on  the  basis 
of  a practically  guaranteed  return,  so  that  while  bearing 
a moderate  interest  return,  they  can  be  sold  without  the 
inducement  of  a speculative  increase  in  value.  To  ac- 
complish this  result  the  utility  operators  should  reject 
the  bad  counsel  of  those  engineers  who  seek  to  establish 
the  ever  shifting  reproduction  value  as  the  basis  for 
the  return.  The  state  or  federal  government  may  prop- 


189 


erly  assure  the  holders  of  public  utility  securities  of  a 
constant  return  upon  money  invested  but  cannot  prop- 
erly assure  them  of  a fluctuating  return  upon  a so-called 
'‘value’’  which  inflates  or  deflates  according  to  the  gen- 
eral price  levels. 

It  is  harvest  time  for  engineering  experts  when  they 
can  revalue  public  utility  properties  every  few  years. 
The  cost  of  the  valuation  of  the  properties  of  the  Peoples 
Gas  Light  & Coke  Company  has  already  far  exceeded 
$1,250,000,  but  these  efforts  are  destructive  of  that  sta- 
bility in  security  values  which  would  make  it  possible 
to  finance  public  utility  extensions  at  a reasonable  cost. 

If  public  utility  commissions  and  public  utility  oper- 
ators would  co-operate  in  the  effort  a program  somewhat 
along  the  following  lines  would  permit  financing  utility 
needs  at  a smaller  cost  than  has  been  suggested  as  pos- 
sible by  any  of  the  previous  witnesses. 

First,  a base  value  of  existing  property  must  be  fixed 
upon  the  basis  of  the  investment  prudently  made  and 
remaining  in  the  property. 

Second,  an  allowance  may  be  made  for  development  of 
the  property  taking  into  consideration  contributions  made 
and  losses  suffered  in  various  ways  to  bring  the  utility 
to  its  present  condition.  This  allowance  offers  the  only 
fair  field  for  the  exercise  of  discretion  as  to  how  far  the 
public  interest  Avill  be  advanced  by  forgiving  improvi- 
dence or  even  dishonesty  in  the  development  of  the  enter- 
prise. If  any  validation  of  wholesale  stock  watering  or 
approval  of  a larger  fictitious  capitalization  is  necessary 
to  rehabilitate  a utility,  public  officials  cannot  assume 
this  responsibility. 

Third,  upon  the  investment  so  determined  a rate  of 
return  should  be  allowed  covering  the  return  appropri- 


190 


ate  to  the  capital  obligations  represented  in  the  prop- 
erty plus  proper  depreciation  and  maintenance  charges. 

Fourth,  upon  the  authorization  of  the  issuance  of  fu- 
ture securities  a revenue  should  be  allowed  for  and  seg- 
regrated  in  the  rate  sufficient  to  pay  a fixed  return.  In 
the  case  of  bonds,  it  might  be  desirable  to  provide  an 
additional  amount  for  a sinking  fund  for  serial  retire- 
ment. In  the  case  of  stock,  the  rate  might  be  subject  to 
adjustment  according  to  financial  conditions,  so  as  to 
encourage  further  investment  for  extensions  as  needed. 

Fifth,  returns  for  capital  provided  for  in  the  commis- 
sion’s orders  should  be  set  forth  as  assurances  of  a find- 
ing by  the  commission  of  actual  investment  and  the  rate 
determined  as  that  commanded  by  the  money  invested, 
not  subject  to  increase  or  deduction  according  to  any 
theoretical  increase  or  decrease  in  the  theoretical  selling 
value  of  property  which  cannot  be  sold  because  devoted 
to  public  service. 

Sixth,  the  commission  supervision  over  the  utility  and 
its  accounts  should  assure  the  public  that  no  money  de- 
rived from  depreciation  charges  or  other  reserves  will 
be  disbursed  as  profits.  To  insure  this  protection  no 
payments  for  use  of  capital  should  be  permitted  in  excess 
of  the  regular  return  allowed,  except  upon  a special  ap- 
proving order  of  the  commission. 

If  the  relation  of  investment  to  securities  outstanding 
in  certain  corporations  is  such  that  no  proper  commission 
order  would  bring  existing  securities  up  to  a price  level 
which  would  permit  the  issuance  of  similar  securities 
except  at  prohibitive  cost,  which  I understand  to  be  the 
situation  confronting  the  Commission  in  certain  cases, 
the  Commission  might  properly  refuse  to  authorize  fur- 
ther securities  except  preferential  securities  approved  by 


191 


the  necessary  present  security  holders  upon  which  a re- 
turn could  be  assured,  and  the  funds  to  provide  the  return 
could  be  segregated  in  the  company’s  accounts.  In  other 
words,  if  a utility  is  improperly  financed  it  must  reor- 
ganize itself,  but  if  it  is  soundly  financed  the  Commission 
can  give  practical  assurance  of  the  value  of  its  securities 
in  the  future. 

It  is  recognized,  of  course,  that  the  government  should 
not  guarantee  a return  to  a private  enterprise,  but  gov- 
ernmental assurance  of  a reasonable  fixed  return  is  the 
responsibility  constantly  assumed  by  commissions  and  if 
assumed  in  a more  formal  manner  than  at  present  should 
go  a long  way  toward  stabilizing  public  utility  securities 
and  enhancing  their  value,  while  at  the  same  time  reduc- 
ing the  capital  burden  on  the  public. 

The  foregoing  suggestion  is  not  presented  as  anything 
peculiarly  original  or  advocated  as  a complete  program. 
It  is  merely  put  forth  as  a suggestion  of  the  lines  along 
which,  with  co-operation  between  public  utility  commis- 
sions, public  utilities,  and  banking  interests,  it  may  be 
possible  to  work  toward  a permanent  improvement  in  the 
present  public  utility  situation.  I hope  it  may  be  re- 
garded as  a service  if  it  is  effective  to  stimulate  discus- 
sion of  some  practical  plan  that  will  do  more  than  merely 
postpone  for  a year  or  two  the  solution  of  an  existing 
evil  which  may  present,  in  a year  or  two,  more  vicious 
alternatives  than  are  now  before  us.  Learned  writers 
as  conservative  as  Professor  Taussig  of  Harvard,  have 
asserted  that  the  test  of  democracy  may  come  in  its  abil- 
ity to  solve  public  utility  problems. 

It  is  a great  responsibility  which  rests  upon  this  Com- 
mission to  determine  a general  policy  such  as  the  one 
now  under  consideration  and  the  Commission  may  well 


192 


draw  to  its  aid  the  counsel  of  those  members  of  the  com- 
munity who  have  not  yet  appeared  before  the  Commis- 
sion who  represent  unbiased  opinion  regarding  the  im- 
portant social,  industrial  and  political  factors  which 
should  be  taken  into  consideration. 

Commissioner  Wilkerson:  You  may  proceed. 

Commissioner  Funk:  I would  like  to  have  you  give 
us  your  idea  on  the  rate  of  return ; I did  not  get  it  clearly ; 
you  read  it  rather  rapidly.  Do  you  think  that  the  rate 
of  return  should  be  a fluctuating  figure  that  might  in 
some  respects  or  to  some  extent  correspond  with  the  fluc- 
tuations in  the  rates  of  interest! 

Mr.  Richberg:  I think  that  as  far  as  stock  is  con- 
cerned that  the  base  on  which  the  return  is  made  is  fixed ; 
that  there  should  be  a margin,  for  necessary  change  in 
the  rate,  allowed  in  order  to  meet  the  demand  for  money 
at  a particular  time. 

Commissioner  Funk:  That  is  not  just  exactly  clear. 
Suppose  there  is  a property  that  is  valued  at  $1,000,000. 

Mr.  Richberg:  Yes. 

Commissioner  Funk:  — and  the  stockholders  put  up 
$500,000,  and  it  is  bonded  for  $500,000.  Now,  the  people 
that  own  the  $500,000  of  stock,  either  benefit,  or  other- 
wise, according  to  the  prosperity  of  the  company. 

Mr.  Richberg:  Yes. 

Commissioner  Funk : And  the  property  is  valued  'at 
a certain  figure  by  this,  or  any  other  commission.  Is  it 
your  view  that  the  rate  of  return  upon  that  property,  * 
the  ownership  of  which  is  in  the  people,  who  own  the 
$500,000  of  stock  with  no  fixed  return  when  the  stock  is 
issued,  no  seven  per  cent,  or  anything  of  that  kind,  they 
get  what  they  get 


193 


Mr.  Eichberg:  Yes. 

Commissioner  Funk : — how  should  the  rates  be  fixed 
by  a.commission  so  that  the  rate  of  return  to  these  people 
who  owned  those  properties  through  the  $500,000  worth 
of  stock  issued,  should  it  advance  or  decline,  correspond- 
ing to  the  fluctuation  of  interest  rates,  prevailing? 

Mr.  Richberg:  I think,  yes,  it  must  be  reflected;  it 
must  reflect  the  prevailing  interest  rates  with  reasonable 
consideration  by  the  Commission  as  to  whether  they  are 
merely  temporary  or  permanent. 

In  other  words,  a general  rise  in  the  rate  demanded 
by  money  must  be  taken  into  consideration  by  the  Com- 
mission, certainly. 

Commissioner  Funk:  I am  conceding  that  the  money 
for  the  improvements,  or  the  enlargements,  may  cost  the 
property  a higher  rate  today  than  it  did  five  years  ago — 

Mr.  Richberg:  Yes. 

Commissioner  Funk : — and  that  the  rates  established 
by  this  Commission  would  affect  that  fact;  however,  in 
consideration  of  that  particular  change,  in  taking  into 
consideration,  in  view  of  that  particular  change,  would, 
of  course,  would  probably  be  higher,  whether  short  term 
notes  or  some  sort  of  preferred  stock,  or  whatever  it 
might  be,  I was  wondering  what  your  views  were,  to 
what  extent  the  rate  of  return  should  fluctuate? 

Mr.  Richberg:  As  to  the  balance  of  the  stock? 

Commissioner  Funk:  Yes,  the  original  issue. 

Mr.  Richberg:  I think  the  rate  there  should  not  be 
subject  to  any  increase,  except  so  far  as  over  a broad 
period  there  may  be  an  entirely  different  level  for  rates 
in  the  community;  then  I think  they  would  have  to  be 


194 


taken  into  consideration,  even  as  to  money  previously  in- 
vested. 

Commissioner  Funk:  That  does  not  give  me  much 
comfort.  Who  knows  whether  the  scale  of  rates,  or 
sphere  of  rates  in  now  are  temporary  for  three  months, 
or  for  three  years;  that  is  the  thing  before  us? 

Mr.  Eichberg:  I think  that  is  a question  entirely  of 
your  best  judgment ; whereas,  in  this  present  situation  it 
has  been  stated  by  witnesses  who  are  competent  to  tes- 
tify to  that  certainly,  that  this  is  an  abnormal  situation. 

Commissioner  Wilkerson:  I have  a number  of  ques- 
tions which  the  Commission  would  like  to  ask,  but  first, 
I would  ask  if  you  have  a copy  of  the  statement  from 
which  you  read  so  the  reporter  can  have  it?  I should  like 
to  have  it  accurate  in  the  record. 

Mr.  Eichberg:  Yes,  I have  an  extra  copy  which  I 
mil  hand  to  the  reporter. 

Commissioner  Wilkerson:  The  Commission  or  perhaps 
some  of  the  parties  may  desire  to  ask  some  questions  at . 
a later  time  but  we  have  some  other  witnesses  here  now 
that  we  would  like  to  release. 

Mr.  Eichberg : I would  be  glad  to  step  aside. 

Commissioner  Wilkerson : The  order  which  appointed 
this  meeting,  Mr.  Eichberg,  provided  that  an  opportunity 
would  be  afforded,  not  only  to  the  utilities  interested  but 
to  any  others  who  might  desire  to  submit  their  views  to 
the  Commission. 

Mr.  Eichberg:  I understood  so. 

Commissioner  Wilkerson : Have  you  any  suggestions 
as  to  that,  how  that  should  be  done?  Do  you  know  of 
any  gentlemen  who  would  care  to  submit  any  views  to 
the  Commission  that  may  support  your  position? 


195 


Mr.  Richberg:  I think,  as  a matter  of  fact,  that  evi- 
dence might  be,  more  desirable,  is  of  such  a character 
as  might  more  naturally  flow  to  the  Commission  upon  a 
suggestion  from  the  Commission  rather  than  from  any 
outside  party. 

Commissioner  Wilkerson:  We  have  asked  no  one  to 
appear  here  to  testify.  They  have  come  in  because  we 
have  appointed  this  hearing. 

Mr.  Richberg:  Yes,  I understand. 

Commissioner  Wilkerson:  You  may  proceed  with  the 
hearing. 

(Witness  withdrawn.) 

Samuel  Insull,  a witness  heretofore  called  herein,  hav- 
ing been  previously  duly  sworn,  was  examined  on  cross 

by  Mr.  Cleveland,  and  testified  as  follows : 

Commissioner  Wilkerson : Mr.  Samuel  Insull  recalled 
for  further  examination.  Do  you  desire  to  ask  any  ques- 
tions 1 

Mr.  Cleveland:  Yes,  sir.  This  is ' cross-examination. 

Commissioner  Wilkerson:  Recalled  for  further  exam- 
ination. 

Mr.  Cleveland:  It  is  for  cross-examination. 

Commissioner  Wilkerson:  You  can  characterize  it 
what  you  will. 

Mr.  Cleveland : Mr.  Insull,  why  do  you  think  that  pub- 
lic utilities  should  be  monopolistic  rather  than  competi- 
tive in  a given  community'? 

A.  I think  in  the  nature  of  their  business  they  have 
got  to  be  monopolistic. 


196 


Q.  Being  monopolistic,  they  would  necessarily  be  sub- 
ject to  public  regulation  in  the  interest  of  the  people, 
would  they  not!  A.  Certainly. 

Q.  That  being  so,  the  question  as  to  their  capitaliza- 
tion or  over-capitalization,  their  management  and  their 
rate  of  return,  are  matters  of  public  consideration,  are 
they  not!  A.  Yes,  sir. 

Q.  And  properly  so,  are  they  not,  Mr.  Insull!  A. 
Properly  so,  sir. 

Q.  And  as  long  as  the  consideration  of  these  questions 
is  carried  on  and  conducted  in  a fair  and  proper  manner 
there  can  be  no  possible  cause  for  objection  to  such  con- 
sideration, can  there!  A.  Certainly  not,  I,  myself,  have 
been  advocating  the  public  regulation  of  public  utilities 
in  return  for  monopoly  since  the  year  1896. 

Q.  Now,  you  said  that  the  present  condition  of  some 
of  the  utilities — I will  speak  more  particularly  about  the 
elevated  railroads,  the  Chicago  Telephone  Company  and 
the  Chicago  Surface  Lines, — that  their  present  financial 
difficulties  were  due  to  politics ; just  what  do  you  mean  by 
that,  Mr.  Insull!  A.  I do  not  think  I made  such  a state- 
ment, Mr.  Cleveland. 

Q.  Just  what  was  it,  did  I understand  you  to  say 
that — A.  Have  you  not  my  evidence  before  you! 

Q.  I understood  you  to  say  it  was  made  the  football 
of  politics.  A.  If  you  will  please  read  my  evidence,  I 
will  try  to  explain  it. 

Q.  The  question  is,  do  you  know  what  I have  reference 
to,  Mr.  Insull!  A.  I would  prefer  you  to  put  your  ques- 
tion, sir. 

Q.  All  right.  I will  put  it  this  way  then:  For  the 
present  you  take  for  illustration  the  Chicago  Surface 


197 


Lines ; you  gave  as  a valuation  of  those  properties  $186,- 
000,000;  where  did  you  get  that  figure,  Mr.  Insull?  A. 
Those  figures  came  from  the  balance  sheet.  You  will  find 
them  on  the  ‘ ‘ asset side  of  their  balance  sheet. 

Q.  You  do  not  pretend  to  have  any  personal  knowl- 
edge in  regard  to  the  actual  valuation  of  the  surface 
lines,  do  you!  A.  No.  I do  not  believe  they  could  be 
duplicated  for  double  the  money. 

Q.  Have  you  been — That  is  a reproduction  for  dou- 
ble the  money?  A.  Yes. 

Q.  You  have  not — Double  what  money!  A.  Dou- 
ble the  amount  of  money  invested. 

Q.  How  much  do  you  understand : $186,000,000  is  what 
you  understand  to  be  invested!  A.  I understand  the 
$186,000,000  was  the  amount  of  assets  the  surface  lines 
had,  just  as  I stated. 

Q.  On  the  basis  of  reproduction,  new,  or  what  basis! 
A.  On  the  basis  of  the  statement  as  shown  by  their  bal- 
ance sheet. 

Q.  You  have  not  been  familiar  with  the  evidence  that 
has  been  introduced  in  regard  to  the  valuations  of  these 
properties,  have  you,  Mr.  Insull!  A.  I do  not  know 
what  you  are  referring  to,  Mr.  Cleveland. 

Q.  There  has  been  a long  hearing  going  on  before 
the  Commission  here,  where  there  has  been  a great  deal 
of  evidence  introduced  in  regard  to  the  valuation  of 
these  properties.  A.  I have  read  nothing  except  the 
head  lines  of  the  articles  when  they  appeared  in  the  news- 
papers. I have  read  none  of  the  transcripts  of  the  evi- 
dence. 

Q.  Are  you  familiar  with  the  1907  ordinance!  A. 
Reasonably  so,  sir. 


198 


Q.  Are  you  familiar  with  the  method  in  which  the 
capital  account  or  purchase  price  is  to  be  built  up  under 
this  ordinance?  A.  Reasonably  so. 

Q.  If  it  is  a fact,  assuming  it  to  be  a fact,  that  these 
properties  are  actually  worth  not  to  exceed  $129,000,000 ; 
and  they  are  mortgaged  for  $144,000,000,  you  could  not 
expect  them  to  have  any  credit,  could  you,  or  to  get  any 
new  money,  be  able  to  get  any  new  money? 

The  Witness : Will  you  please  read  that  question? 

(Question  read.) 

Commissioner  Wilkerson:  Read  that  question  again, 
please  ? 

' (Question  read.) 

Commissioner  Lucey : It  occurs  to  me  that  your  ques- 
tion, Mr.  Cleveland,  is  not  based  on  anything  that  is  in 
here  in  the  nature  of  direct  evidence.  Now,  if  it  is  a 
proper  hypothetical  question,  it  ought  to  embody  the  ele- 
ments that  have  been  presented  here. 

Mr.  Cleveland : We  proved  by  our  witnesses  that  even 
on  the  basis  to  reproduce  new — 

Commissioner  Lucey:  I have  no  objection  to  your 
asking  any  question,  of  any  kind,  which  belongs  in  this 
hearing,  but  the  evidence  in  that  railroad  hearing,  of 
course,  is  not  in  this  hearing. 

Mr.  Cleveland:  I am  assuming  that  is  the  valuation. 

Commissioner  Lucey:  Of  course,  on  any  kind  of  a 
question  of  that  kind,  you  could  assume  there  was  $140,- 
000,000  in  mortgages. 

Mr.  Cleveland : I am  cross-examining  Mr.  Insull. 

Commissioner  Lucey:  And  the  question  answers 
itself.  There  is  no  direct  evidence  on  anything  that  this 
witness  has  said,  or  that  any  other  witness  has  said. 


199 


which  is  a proper  foundation  for  the  hypothetical  ques- 
tion you  assume. 

Mr.  Cleveland : This  is  cross-examination,  and  I want 
to  find  out  from  Mr.  Insull,  what  is  the  reason  these  com- 
panies have  not  got  any  credit,  and  canT  get  new  money. 

Commissioner  Lucey:  I say  to  you,  the  hypothetical 
question  that  you  have  propounded  is  not  based  on  any 
evidence  which  is  in  the  record  before  you  now. 

Mr.  Cleveland:  Not  in  this  hearing.  It  is  in  the  rec- 
ord in  the  surface  lines  case,  I think. 

Commissioner  Lucey:  Of  course,  those  questions  an- 
swer themselves.  You  can  state  questions  to  which  there 
can  be  no  dispute,  or  about  which  there  can  be  no  dis- 
pute. 

Mr.  Cleveland : I would  like  to  have  Mr.  Insull  answer 

it. 

The  Witness : Suppose  you  read  that  question  again, 
please f Would  you  mind  reading  it  again? 

(Last  question  read.) 

A.  It  is  impossible  for  me  to  answer  a question  of 
that  kind,  Mr.  Wilkerson.  I can’t  assume  a fact  that  is 
not  a fact.  I can’t  assume  that  these  properties  are  only 
worth  $129,000,000,  when  I believe  they  are  worth  a good 
deal  more  than  that. 

Commissioner  Wilkerson:  You  have  not  studied  in 
our  school  of  logic,  Mr.  Insull,  long  enough. 

Mr.  Cleveland:  I am  asking  just  the  question;  I am 
asking  you,  Mr.  Insull,  whether,  assuming — ^we  claim 
these  are  the  facts — ^I  am  asking  you  to  assume  that ; as- 
sume those  are  the  facts,  the  company  would  have  no 
chance  to  get  a loan  or  to  get  an  investment  in  their  prop- 
erties, would  it? 


200 


A.  Of  course  it  would  not. 

Commissioner  Wilkerson : If  you  had  a house  worth 
$1,000,  with  a $2,000  mortgage  on  it,  and  you  wanted  to 
borrow  a thousand  more,  on  that  house — could  you! 

A.  No. 

Mr.  Cleveland:  Now,  as  a matter  of  fact,  it  is  a basis 
of  all  financing,  or  all  loans,  taking  the  loans  at  present, 
that  there  shall  be  a reasonable  margin  of  security  to  pro- 
tect the  principal,  isn’t  that  so,  Mr.  Insull? 

A.  No,  not  always.  That  is  not  so.  That  was  not  so 
in  the  case  of  the  securities  placed  on  the  Chicago  Surface 
Lines,  the  security  given  to  the  bondholders  who  took 
the  Chicago  Surface  Lines  bonds  was  the  amount  of  prop- 
erty as  valued  by  experts  of  the  City  of  Chicago,  and  as 
recognized  by  ordinance  of  the  City  of  Chicago;  and  it 
was  a further  security  of  the  good  faith  of  the  City  of 
Chicago  that  it  would  carry  out  the  obligations  of  that 
ordinance — 

Q.  Yes.  A.  — I think  that  was  a very  important 
point,  and  part  of  the  security  given.  It  had  a distinct 
value  as  long  as  that  good  faith  was  not  attacked. 

Q.  That  is  to  say,  that  the  value  of  these  securities 
depended  upon  the  contracts  between  the  city  and  the 
companies  being  carried  out  in  good  faith!  A.  In  good 
faith. 

Q.  What  would  you  have  said,  Mr.  Insull,  as  to  the 
good  faith  of  the  city  if  it  had,  say  four  or  five  years  ago, 
come  before  this  Commission — even  before  this  Commis- 
sion was  created,  and  attempted  to  reduce  the  rates  of 
fare  therein  provided!  A.  The  city  has  no  control  over 
that  subject. 

Q.  Before  they  did!  A.  According  to  the  Supreme 


201 


Court  of  the  state.  Excuse  me,  I am  not  a lawyer,  but 
I understand  that,  sir. 

Q.  Do  you  think,  or  is  it  your  idea,  that  the  city  alone 
is  bound  to  carry  out  these  contracts  in  good  faith?  A. 
Oh,  no. 

Q.  Is  it  a clear  obligation  on  the  part  of  the  compa- 
nies to  comply  with  their  obligations?  A.  Absolutely. 

Q.  Do  you  object — A.  Might  I ask  a question,  if 
you  will  excuse  me? 

Q.  I am  not  testifying.  A.  Is  it  their  obligation — 
are  you  assuming  it  is  their  obligation  to  carry  out  that 
contract  even  when  it  is  impossible  to  pay  operating  ex- 
penses of  the  property  at  the  fare  provided? 

Q.  I will  answer  your  question  by  asking  this : — A. 
If  you  want  a general  discussion  of  the  street  railway  sit- 
uation, we  might  as  well  have  it  here,  if  the  Commission 
will  indulge  us,  but  I think  Mr.  Cleveland  is  far  exceed- 
ing the  purpose  of  this  inquiry,  as  I understand  it.  I 
do  not  think  I am  a witness  in  the  street  car  case. 

Q.  You  testified  about  that,  did  you  not?  A . I testi- 
fied generally  about  the  subject  of  utilities. 

Q.  You  mentioned  the  surface  lines  in  particular.  A. 
I could  not  help  myself. 

Q.  Now  we  are  taking  it  up.  Now,  Mr.  Insull,  is  it 
your  idea  that  where  a contract  is  made  for  a period  of 
twenty  years,  and  the  utility  has  had  the  benefit  of  the 
contract  for  twelve  years,  and  we  will  assume  has  reaped 
great  benefits  out  of  it,  do  you  then  think  it  is  fair  and 
just  when  the  hard  times  or  the  lean  years  come,  to 
change  the  contract  so  as  to  guarantee  the  return?  A. 
I would  not  presume  to  sit  here  even  as  a witness  to 


202 


criticize  the  decisions  of  this  Commission  unless  the  Com- 
mission instructs  me  to. 

Q.  They  wonT. 

Commissioner  Wilkerson:  I might  say,  about  this 
cross-examination,  or  this  examination,  that  any  other 
person  who  may  desire  to  participate  may  do  so,  and  it 
is  the  hope  of  the  Commission  that  the  examination  be  lim- 
ited to  the  subject  in  the  hearing;  and  that  witnesses  will 
be  cross-examined  about  matters  which  they  testified 
upon,  points  on  which  they  testified  on  direct,  mat- 
ters which  are  pertinent  to  the  inquiry  before  the  Com- 
mission. We  trust  it  will  not  be  necessary  to  announce 
a time  limitation  upon  the  time  of  cross-examination, 
but  the  docket  of  the  Commission  is  in  such  condition  that 
an  extended  cross-examination  of  several  days  will  not 
be  practicable ; and  if  we  are  compelled,  we  will  impose  a 
time  limitation  on  the  cross-examination. 

Mr.  Cleveland:  Now,  Mr.  Insull,  take  the  case  of  the 
Chicago  Surface  Lines;  is  it  your  understanding  that 
they  can  or  cannot  get  new  money  as  matters  now  stand  ? 

A.  They  can’t  get  it;  that  is  my  judgment. 

Q.  Now  they,  as  you  understand  it — the  service  at 
present  is  inadequate?  A.  Very  bad  in  my  judgment. 

Q.  And  they  need  new  capital  to  make  extensions  and 
enlargements  to  catch  up  with  the  growth  of  the  city? 
A.  Very  badly,  sir. 

Q.  What  is  your  view ; — is  it  your  view  that  the  rates 
should  be  imposed  upon  the  public  to  produce  the  new 
capital  to  make  these  extensions?  A.  To  a limited  ex- 
tent, so  far  as  the  interests  of  the  community  require  it 

Q.  So  that  I won’t  misunderstand  you;  for  instance, 
we  will  say  on  a certain  street  they  need  an  extension  of 


203 


five  miles  of  tracks  to  serve  a given  community;  then 
you  think  that  the  rates  should  be  imposed  to  get  money 
enough  to  make  that  extension;  is  that  right?  A.  Yes, 
and  no.  I would  consider  that  in  the  present  condition 
of  the  cost  of  money  and  the  cost  of  labor  and  the  cost 
of  material  that  that  should  be — there  should  be  a very 
great  hesitation  as  to  extending  five  miles  of  track  in  any 
one  particular  spot  in  the  City  of  Chicago. 

Q.  Supposing — A.  Would  you  mind  my  getting 
through  ? 

Q.  All  right.  Go  ahead.  I thought  you  were  through. 
A.  I think  a matter  of  that  kind  should  be  settled  by 
an  expert  body  such  as  the  Public  Utilities  Commission. 

Q.’  But  assuming  that  it  is  settled,  that  the  extension 
should  be  made,  do  you  think  then  that  rates  should  be 
imposed  on  the  people  to  get  the  capital  to  make  that  ex- 
tension? A.  Well,  now,  if  that  is  in  a direction  where 
certain  real  estate  operators  are  more  greatly  profited, 
or  to  be  greatly  profitable  by  the  extension  of  that  track 
into  that  territory,  I would  say  the  burden  should  rest 
largely  upon  them.  I would  do  it  more  by  special  assess- 
ment if  I had  the  power  than  by  assessing  the  whole  com- 
munity. 

Q.  But  assuming  it  is  for  the  benefit  of  the  people  at 
large  to  make  this  extension,  is  it  your  view  that  rates 
should  be  imposed  to  provide  capital  to  make  the  exten- 
sion? A.  I canh  assume  that  because  I do  not  know 
of  any  one  spot  where  five  miles  of  track  built  in  the  City 
of  Chicago  would  be  for  the  benefit  of  the  community  at 
large. 

Q.  Well,  all  right;  let  us  take  another  basis.  Sup- 
pose they  need  more  cars,  more  equipment,  to  accommo- 


204 


date  the  public,  would  you  say  they  should  have  that  im- 
posed upon  them — A.  I should  say  yes,  then,  yes. 

Q.  The  rate  should  be  imposed  to  provide  money  to 
buy  cars?  A.  Yes,  sir. 

Q.  Then  who  would  the  cars  belong  to  ? A.  The  cars 
would  belong  to  the  company  with  the  right  to  the  city, 
under  the  1907  ordinance  to  acquire.  I may  be  in  error. 
I am  giving  it  from  memory.  I have  not  that  ordinance 
before  me,  but  I think  they  would  not  have  to  pay  one 
penny  for  those  cars. 

Q.  That  is  to  say,  you  would  not  add^ — your  idea  is 
to  not  add  the  cost  of  these  extensions  that  are  to  be 
made  from  the  proceeds  of  the  rates,  to  the  purchase  price 
or  the  capital  account — A.  I would  say  that  would  be 
paid  in  this  case,  just  as  it  is  when  the  case  did  come  up 
before  this  Commission  for  investigation.  If  investment 
is  made  out  of  the  surplus  funds,  in  the  case  of  a corpo- 
ration here,  you  have  a pretty  hard  time  to  get  a return 
on  that  money  from  this  Commission. 

Q.  You  know  they  have  a capital  account,  Mr.  Insull, 
and  a purchase  price  under  the  ordinance  I A.  There  is 
not  a dollar  charged  against  that  capital  account  with- 
out being  approved  by  the  engineers  of  the  city. 

Q.  Well,  the  board  of  supervising  engineers?  A. 
Yes. 

Q.  They  are  not  of  the  city;  one  is  appointed  by  the 
city  and  represents  the  city — A.  Under  the  ordinance. 

Q.  — under  the  ordinance.  Now,  then,  that  is  added  to 
the  purchase  price  in  the  case  of  extensions,  approved 
by  the  Board  of  Supervising  Engineers?  A.  Yes. 

Q.  Now,  supposing  there  are  a lot  of  cars  purchased 
at  that  time, — would  you  say  that  the  cost  of  those  cars 


205 


should  be  added  to  the  purchase  price,  even  if  they  are 
to  be  paid  out  of  the  rates!  A.  No ; I have  said  I do  not 
think  that  is  a fair  proposition. 

Q.  Now,  isn’t  it  a fact  that  the  surface  lines,  as  you 
understand  it,  are  in  a position  where  they  must  get  new 
capital  in  order  to  remove  the  present  inadequacy  of  the 
service!  A.  Yes,  they  need  new  capital. 

Q.  Do  you  know  of  any  other  way  to  get  capital,  ex- 
cept to  get  it  out  of  the  rates!  A.  Not  with  their  credit 
in  the  condition  it  is. 

Q.  Do  you  not  think,  Mr.  Insull,  that  if  the  security 
holders,  or  the  holders  of  the  securities,  would  consent 
to  have  a prior  lien  put  on  the  property  to  raise  what 
they  needed,  these  six  or  eight  million  dollars,  that  they 
could  get  that  money!  A.  I think  that  is  a ridicu- 
lous question,  Mr.  Cleveland. 

Q.  Assuming  it  is,  Mr.  Insull,  could  it  be  done!  A. 
No.  You  could  not  get  that.  Why  should  a man  who  has 
bought  the  bonds — those  bonds  are  scattered  from  Maine 
to  California — why  should  a man,  or  a woman,  or  an  es- 
tate, that  has  bought  a bond  partly  upon  the  security  of 
the  street  railways  and  partly  upon  the  security  of  the 
good  faith  of  the  City  of  Chicago,  why  should  that  man 
surrender  his  right  to  a prior  lien  on  that  property! 

Q.  Possibly  because  there  has  not  been  good  faith  on 
the  part  of  the  company  now. 

Commissioner  Lucey : It  seems  to  me,  Mr.  Cleveland, 
this  is  cross-examination  based  on  the  valuation  of  the 
street  car  companies.  Now,  that  is  not  the  purpose  of 
this  hearing. 

Mr.  Cleveland:  We  are  trying  to  get  the  facts. 

Commissioner  Lucey:  Try  to  confine  yourself  to  the 


206 


general  situation.  That  arises  because  of  the  settlement 
ordinance,  is  a question  which  is  peculiar  to  that  situa- 
tion, and  it  is  of  no  benefit  as  to  the  other  utihties,  and 
your  questions  should  be  as  general  as  the  hearing  is. 
Otherwise  it  is  of  no  value  to  any  of  the  other  utilities. 
The  1907  ordinance  does  not  help  us  here. 

Mr.  Cleveland : It  does  have  an  application  here,  how- 
ever. 

Commissioner  Lucey:  Make  your  question  as  general 
as  the  direct  examination;  how  does  that  apply  to  the 
telephone  company? 

Mr.  Cleveland:  But,  Mr.  Commissioner,  you  allowed 
them  on  their  direct  examination  to  segregate  these 
properties,  and  it  is  not  fair  to  us  to  make  us  go  in  gen- 
erally. 

Commissioner  Lucey:  Your  cross-examination  is  de- 
voted peculiarly  to  this  one  utility.  We  are  considering 
the  utilities  in  Cairo  and  Gralena,  just  the  same  as  we  are 
the  ones  in  Chicago. 

Mr.  Cleveland:  The  witness  has  testified  specifioally 
about  the  surface  lines,  the  elevated  railroad,  and  the 
telephone — 

The  Witness:  Generally — 

Mr.  Cleveland : His  testimony  was  he  did  testify  about 
it. 

Commissioner  Lucey:  Very  well,  I do  not  care. 

Mr.  Cleveland:  Now,  Mr.  Insull,  it  has  frequently 
happened,  in  your  experience,  has  it  not,  that  where  a 
company  was  unable  to  meet  its  interest  charges,  and  to 
live  up  to  its  contracts,  that  a receiver  has  been  appointed 
to  act,  and  by  means  of  receiver’s  certificates  has  been 
able  to  get  money  which  may  be  needed  to  carry  out  its 


207 


obligations  to  the  public.  Hasn’t  that  frequently  hap 
pened? 

A.  In  my  experience? 

Q.  Not  in  your  particular  companies,  but  of  your 
knowledge?  A.  To  my  knowledge  it  has  happened,  yes. 

Q.  You  stated  that  the  elevated  railroads  were  in  de- 
fault on  $12,000,000?  A.  Yes,  sir. 

Q.  Of  their  notes?  A.  Yes. 

Q.  And  practically  in  the  hands  of  a receiver?  A. 
Practically. 

Q.  Are  the  individual  elevated  railroad  companies  in 
default  on  any  of  their  obligations?  A.  No,  none  of  their 
obligations. 

Q.  The  default  is  with  respect  to  the  notes  issued  by 
the  holding  company?  A.  The  holding  company. 

Q.  Is  it  possible,  under  existing  conditions,  for  the 
elevated  railroad. company  to  get  new  loans  or  to  procure 
additional  investments  in  the  property?  A.  No;  neither 
in  this  holding  company  itself,  which  is  in  default,  nor 
in  its  subsidiary  companies,  which  are  not  in  default, 
owing  to  the  very  bad  repute  of  the  City  of  Chicago  as  a 
result  of  the  attitude  of  the  administration  towards  the 
surface  railroads. 

Q.  That  is,  you  mean — A.  That  is  my  judgment. 

Q.  Now,  Mr.  Insull,  you  are  familiar  with  the  elevated 
railroads  in  particular  ? A.  Yes. 

Q.  Is  or  is  not  their  service  and  their  equipment  in- 
adequate? A.  Absolutely  inadequate.  They  need  bigger 
platforms,  longer  trains,  and  vastly  increased  equip- 
ment. 

Q.  Is  there  any  way  that  you  know  of  to  get  this  in- 


208 


creased  capital,  except  by  imposing  rates  upon  the  pub- 
lic? A.  I do  not  know  of  any  other  one.  Of  course,  in 
the  situation — 

Q.  You  mean — A.  — of  the  elevated  railroads  there 
is  no  question  of  the  property.  There  is  vastly  more 
property  there  than  there  are  prior  lien  obligations 
outstanding.  That  is  generally  conceded.  I think  even 
you  would  concede  that,  but  their  situation  is  precisely 
the  same  as  far  as  the  possibility  of  raising  capital  is 
concerned,  as  that  of  the  surface  lines.  They  have  a lack 
of  income  to  carry  the  securities,  although  they  have  a 
tremendous  margin  of  property  over  prior  securities 
issued. 

Q.  Now,  what  rate  would  you  think  that  the  elevated 
would  have  to  have  in  order  to  enable  them  to  get  this 
necessary  capital?  A.  Well,  they  need  two  things — 
three  things.  Fundamentally  they  need  more  gross  rev- 
enue. Next  they  need  a different  attitude  of  the  city  ad- 
ministration towards  the  transportation  proposition. 
The  third  thing  involved  would  be  the  question  of  the 
ruling  rate  for  money,  and  they  would  have  to  pay,  of 
course,  whatever  rate  is  going. 

Q.  Now,  might  I not  add  a fourth  element,  and  that  is 
the  absolute  lack  of  confidence  of  the  public  in  these  utili- 
ties? A.  Well,  what  has  brought  that  about? 

Q.  Are  you  asking  me  what  has  brought  that  about? 
A.  That  is  what  I meant  when  I stated  that  one  of  the 
difficulties  of  the  situation  was  the  making  of  utilities  the 
football  of  politics. 

Q.  Yes.  A.  That  is  what  I meant  by  that. 

Q.  Yes.  A.  Yes. 

Q.  That  is  to  say,  it  has  been  made  the  matter  of  pub- 


209 


lie  consideration  and  discussion?  A.  Hardly.  That  is 
hardly  fair,  Mr.  Cleveland. 

Q.  What?  A.  That  is  hardly  fair. 

Q.  Isn’t  it?  A.  Was  the  70-cent  gas  ordinance  of 
Carter  Harrison ’s  time  a mere  public  consideration  of  a 
public  utility  question?  Was  the  $50,000,000  valuation 
of  the  People ’s  Gas  Light  & Coke  Company  in  Chairman 
O’Connell’s  time  of  the  Public  Utilities  Commission  a 
fair  consideration  of  a utility  question?  These  are  the 
things  I mean  when  I talk  about  the  utilities  being  made 
political  footballs. 

Q.  Mr.  Insull,  do  you  think  it  was  a fair  valuation  of 
the  Chicago  Surface  Lines  to  include  in  it  from  forty- 
four  million  in  the  capital  account, — from  $44,000,000  to 
$75,000,000  that  represented  no  property  at  all?  A. 
Wasn’t  that  in  the  1907  ordinance? 

Q.  Yes.  A.  Wasn’t  that  approved  by  the  city  coun- 
cil? 

Q.  Yes.  A.  Wasn’t  it  approved  by  the  people  of 
Chicago  ? 

Q.  Yes.  A.  Sir? 

Q.  Yes,  and  wasn’t  it  repudiated  by  the  surface  lines? 
Now,  Mr.  Insull,  as  a matter  of  fact,  don’t  you  recog- 
nize— A.  Why  did  you  drop  the  elevated  roads?  Wliy 
not  come  back  to  the  elevated  roads? 

Q.  I am  willing  to  come  back  to  the  elevated  roads. 
A.  I am  more  familiar  with  that. 

Q.  Now,  will  you  answer  the  question,  Mr.  Insull, 
that  I put  to  you?  A.  Yes,  I will  try  to. 

Q.  I asked  you  what  rates  you  think  are  necessary  in 
order  to  get  you  the  capital  that  is  required  to  remove 
the  inadequacy  of  the  elevated  railroads’  service  and 
equipment?  A.  What  rates  are  necessary? 


210 


Q.  Yes,  sir?  A.  I think  you  have  got  to  restore  their 
credit  before  you  can  have — 

Q.  You  asked  me  not  to  get  otf  of  the  subject.  I am 
asking  you  about  the  rate.  A.  I am  right  on  the  sub- 
ject. 

Commissioner  Lucey:  Let  him  answer. 

A.  We  have  got  to  restore  the  credit  and  earning  ca- 
pacity of  those  properties  before  it  is  possible  for  them 
to  go  into  the  money  market  of  this  city  or  ally  other 
city  to  raise  money. 

Q.  How  are  you  going  to  do  it?  What  is  the  rate  you 
want  to  do  it?  A.  Do  you  mean  the  rate  of  fare? 

Q.  Yes?  A.  Oh,  I thought  you  were  talking  about 
the  cost  of  money.  I don’t  know.  I am  not  competent 
to  answer  that. 

Q.  Would  it  require  a considerably  higher  rate  than 
you  are  getting  now?  A.  It  depends  entirely  upon  the 
cost  of  labor  and  material. 

Q.  Suppose  the  cost  of  labor  and  material  continues 
as  at  the  present  time?  A.  They  are  more  likely  to  go 
up  in  the  case  of  the  elevated  and  surface  lines. 

Q.  Would  you  require  as  high  a rate  of  fare  then  as 
now,  if  it  goes  up  ? A.  Require  higher. 

Q.  Higher?  A.  Yes. 

Q.  That  is  what  we  want  to  know, — a rate  of  how 
much,  Mr.  Insull?  A.  They  need  a higher  rate  now;  they 
are  running  behind,  both  the  surface  and  elevated  lines. 

Q.  How  much  higher  do  you  say  they  should  have? 
A.  I don’t  know. 

Q.  Take  the  telephone  company,  it  can  get  money, 


211 


can’t  it,  if  it  pays  the  rate  they  ask?  A.  I don’t  know. 
Why  not  ask  Mr.  Sunny?  He  is  the  president. 

Q.  You  testified  about  it.  I want  to  ask  you.  You 
gave  your  views  about  it  the  other  day.  A.  They  can  get 
money  at  the  rate — 

Q.  And  the  Commonwealth  Edison  Company  can  get 
money  at  the  rate  ? A.  At  the  rate,  yes. 

Q.  That  is  because  you  have  security  to  offer  for  the 
principal,  isn’t  it?  A.  But  the  elevated  has  ample  se- 
curity to  offer  for  the  principal. 

Q.  I am  asking  you — A.  They  have  got  just  as 
much  security  so  far  as  property  is  concerned  relatively 
as  the  Edison  Company  and  Telephone  Company. 

Q.  Why  can’t  the  elevated  company  get  the  money? 
A.  Because  the  revenue  that  they  earn  based  upon  the 
present  rate  of  fare  is  insufficient  to  pay  the  cost  of 
operation  plus  their  present  fixed  charges. 

Q.  Then  the  revenue  in  the  telephone  case,  I take  it, 
in  your  view,  is  sufficient  for  those  purposes?  A.  Oh, 
yes.  To  pay  the  present  fixed  charges. 

Q.  Yes.  A.  Yes. 

Chairman  Wilkerson:  Do  you  mean  the  telephone  or 
the  Edison? 

A.  What? 

Chairman  Wilkerson:  Do  you  mean  the  telephone  or 
the  Edison? 

A.  Both. 

Mr.  Cleveland:  That  is  all,  Mr.  Insull. 

Chairman  Wilkerson : Call  your  next. 


212 


B.  E.  Sunny  resumed  the  stand: 

(Colloquy  omitted.) 

Mr.  Binger:  We  simply  stated  we  did  not  care  to 
cross-examine  Mr.  Sunny  and  gave  you  the  reasons  why, 
because  his  direct  examination  presented  a situation 
which  did  not  require  any  cross-examination. 

Chairman  Wilkerson : Very  well ; call  the  next  witness 
then. 


Henry  A.  Blair,  recalled  for  cross-examination  by  Mr. 

Cleveland,  and  testified  as  follows: 

Q.  Mr.  Blair,  do  you  think  that  the  Chicago  Surface 
Lines  ought  to  be  taken  out  of  politics!  1 understand 
you  approved  that  statement,  did  you! 

Mr.  Sheean:  That  is  objected  to  as  not  cross-exam- 
ination. 

A.  I did  not  know — 

Mr.  Sheean:  Just  a moment.  That  is  objected  to  as 
not  cross-examination. 

Mr.  Cleveland:  He  said  he  approved  what  the  others 
said  on  the  subject.  He  said  the  trouble  is  they  are  made 
the  football  of  politics. 

Mr.  Sheean : The  statement  is,  ‘ ‘ The  statements  made 
by  the  two  witnesses,  by  Mr.  Sunny  and  Mr.  Insull  on 
the  general  situation  I concur  in  in  full,^’  and  that  gen- 
eral situation  is  the  one  covered  and  prescribed  by  the 
order  of  the  Commission  as  to  what  they  desire  to  be 
heard  upon. 

Chairman  Wilkerson:  What  is  the  question! 


218 


(Question  read.) 

Chairman  Wilkerson:  Did  you  approve  it? 

A.  I think  it  should  be  taken  out,  if  it  is  in. 

Mr.  Cleveland:  Mr.  Blair,  don’t  the  Chicago  Sur- 
face Lines  maintain  in  the  city  hall  a gentleman  by  the 
name  of  Bogy,  whose  only  business  is  to  keep  the  surface 
lines  in  politics  ? 

A.  I don’t  know.  I cannot  answer  that. 

Q.  Do  you  keep  a man  or  men  at  Springfield  for  the 
same  purposes?  A.  Not  that  I know  of. 

Q.  When  the  1918  ordinance  was  before  the  people  did 
you  not  maintain  a bureau, — I mean  by  you,  the  surface 
lines, — for  the  purpose  of  carrying  on  a political  pro- 
paganda in  favor  of  that  ordinance? 

Mr.  Sheean:  That  is  objected  to. 

Commissioner  Lucey:  Sustained. 

Mr.  Cleveland : Exception. 

Q.  And  did  you  not  in  that  connection,  and  was  it 
not  in  connection  with  that  campaign  that  the  question 
as  to  the  validity  of  your  contracts  with  the  city  and 
the  valuations  thereunder  was  first  brought  before  the 
people? 

Mr.  Sheean:  Objected  to  as  having  no  materiality 
or  relevancy  to  anything  within  the  scope  of  this  inquiry. 

Chairman  Wilkerson:  Objection  sustained. 

Mr.  Sheean : Or  being  cross-examination  of  anything 
that  has  been  adduced  by  any  witness. 

Chairman  Wilkerson : Objection  sustained. 

Mr.  Cleveland : Exception. 

Q.  Mr.  Blair,  is  the  service  of  the  Chicago  Surface 


214 


Lines  and  its  equipment  at  the  present  time  inadequate 
for  the  public  service!  A.  I think  it  is. 

Q.  Do  you  know  of  any  way  that  you  can  get  money 
to  remove  that  inadequacy!  A.  Not  at  present,  under 
present  conditions. 

Q.  Have  you  made  any  effort  to  get  that  money  from 
your  stockholders!  A.  No,  sir. 

Q.  Have  you  made  any  effort  to  get  the  security 
holders,  the  holders  of  the  outstanding  indebtedness  of 
the  company,  to  waive  their  claims  to  the  extent  of  allow- 
ing you  to  raise  money  on  the  properties  for  that  pur- 
pose! A.  No,  sir. 

Q.  Have  you  made  any  effort — what  effort  have  you 
made  to  get  this  money  except^ — well,  what  effort  have 
you  made  to  get  this  money!  A.  I have  been  in  touch 
with  the  bankers  who  have  financed  the  property  since 
1908  up  to  1917,  the  period  in  which  the  war  started,  and 
we  have  been  refused. 

Q.  You  have  tried  to  borrow  the  money!  A.  Yes,  sir. 

Q.  By  a lien  that  would  be  a junior  lien  to  the  exist- 
ing encumbrances!  A.  No,  sir. 

Q.  How!  A.  By  a lien  on  the  property;  the  money 
actually  would  go  into  the  property  and  bonds  issued 
for  that  purpose. 

Q.  Would  the  bonds  be  secured  in  any  way!  A. 
Would  be  secured  by  the  valuation  that  goes  into  the 
property, — the  additional  amount  that  goes  into  the  prop- 
erty. 

Q.  No  mortgage  or  trust  deed!  A.  Yes,  first  mort- 
gage. 

Q.  First  mortgage  on  what!  A.  On  the  entire  prop- 


215 


erty.  There  is  an  equity  in  the  properties  of  $50,000,000 
in  the  surface  lines  today. 

Q.  On  what  basis — now,  do  you  mean  to  say  that 
your  mortgage  that  you  would  give,  that  you  offered  to 
these  bankers,  was  a mortgage  that  would  be  ahead  of  the 
existing  mortgages  on  the  property? 

Mr.  Sheean : I think  the  Commission  understands  that 
the  first  mortgage  there  is  an  open  mortgage  under  which 
all  bonds  that  are  issued  become  part  of  it. 

Chairman  Wilkerson : That  is  part  of  the  record. 

Mr.  Sheean:  Yes,  that  is  part  of  the  record  that  we 
have  been  over. 

A.  It  is  part  of  the  record. 

Mr.  Cleveland:  That  don’t  answer  my  question. 

Q,  What  I want  to  know  is  this,  was  the  mortgage 
that  you  were  going  to  give  to  secure  the  bonds  to  be  a 
new  mortgage  ahead  of  the  existing  mortgage?  A.  No, 
sir,  it  was  not. 

Q.  You  proposed  to  issue  more  bonds  under  the  pres- 
ent mortgage?  A.  Open  mortgage. 

Q.  Yes.  A.  Yes. 

Q.  Now,  you  say  there  is  an  equity  of  $50,000,000 
there,  Mr.  Blair?  A.  Yes,  sir. 

Q.  Over  and  above  your  mortgages?  A.  First  mort- 
gage. 

Q.  How  much  are  the  first  mortgages  outstanding? 
A.  On  both  properties  ? 

Q.  On  all  properties  ? A.  About  one  hundred  million 
dollars. 

Q.  How  much  is  the  indebtedness  outstanding?  A. 

« 


216 


About  one  hundred  forty-four  or  forty-five  million  dol- 
lars. 

Q.  How  is  the  forty-four  million  dollars  secured?  A. 
That  is  a junior  mortgage. 

Q.  Junior  mortgage?  A.  Yes,  sir;  what  is  known 
as  the  Consolidated  mortgage. 

Q.  How  much  of  the  mortgage,  of  the  one  hundred 
million  dollar  mortgage,  represents  money  procured  by 
the  companies,  actual  new  money  procured  by  the  com- 
panies that  went  into  the  properties  after  the  contracts 
of  1907  were  made?  A.  All  of  it. 

Q.  All  of  it?  A.  Yes. 

Q.  How  much  of  the  forty-four  million  dollars  was 
used  for  that  purpose?  A.  That  was  obligations  that 
existed  in  the  parent  companies  at  the  time  of  the  1907 
ordinance. 

Q.  All  of  this  forty-four  million  dollars  indebtedness 
existed  prior  to  1907  ? A.  Yes,  sir. 

Q.  This  forty-four  million  dollars  was  to  take  care 
of  the — A.  I think  there  is  one  mortgage  there  in  1907, 
what  is  known  as  the  Consolidated  mortgage,  representing 
purchase  money  property.  The  ordinance  of  1907  re- 
quired the  Chicago  Eailways  Company  to  take  over 
within  two  years  the  Consolidated  system,  in  1910',  I think 
it  was.  That  was  taken  over,  and  there  is  $4,073,000 
represented  for  that  company  that  went  in  in  1910'. 

Q.  But  with  the  exception  of  that,  the  forty-four  mil- 
lion dollars  was  to  take  care  of  the  old  claims  that  existed 
prior  to  the  contracts  of  1907  under  the  plan  of  reorgani- 
zation that  was  affected  at  that  time,  is  that  so?  A. 
Well,  there  was  some  of  the  Calumet  & Southern  Kailway 
included  in  that.  The  Chicago  Railways  Company, 


217 


as  I recall,  amoanted  to  about  thirty-seven  million  dol- 
lars. There  is  about  seven  million  dollars  in  excess  of 
the  valuation.  I think  that  is  all  a matter  of  record. 

Q.  Now,  on  what  valuation, — on  what  basis  do  you 
say  that  there  is  a fifty  million  dollars  equity?  I mean, 
what  valuation  do  you  take  for  the  basis  of  that  state- 
ment? A.  The  ordinance  of  1907  put  a valuation  on 
those  properties  of  fifty  million  dollars,  which  went  as 
part  of  the  credit,  or  really  was  the  credit  with  the  ordi- 
nance for  our  making  the  extensions  which  has  amounted 
to  one  hundred  million  dollars. 

Q.  Is  it  or  not  true  that  in  your  statement  that  there 
is  a fifty  million  dollars  equity,  that  you  are  accepting 
as  the  valuation  of  these  properties  the  amount  of  the 
purchase  price?  A.  Yes. 

Q.  Under  the  ordinances?  A.  That  is  right.  Yes, 
that  is  right. 

Q.  That  is  what  you  rely  on,  is  it?  A.  Yes. 

Q.  Have  you  taken  into  consideration  any  elements 
that  enter  into  that  purchase  price  that  are  no  longer  in 
the  service  ? A.  I have  not. 

Q.  You  took  the  full  purchase  price?  A.  Yes,  sir. 

Q.  You  know,  as  a matter  of  fact,  that  there  is  in- 
cluded in  there  ten  million  dollars  for  the  franchise,  that 
is,  the  right  to  run  on  the  streets,  Mr.  Blair?  A.  Yes, 
sir. 

Q.  That  is  true,  is  it  not?  A.  Yes,  sir. 

Q.  There  is  included  in  there  some  six  million  dollars 
for  power  houses  that  are  dismantled  and  no  longer  in 
use  in  the  public  service,  isn’t  that  true?  A.  Yes,  sir. 

Q.  There  is  included  in  there  three  million  dollars 


218 


and  more  for  organization  expense,  that  is  true,  isn^t  it! 
A.  I am  not  positive  about  that,  no  sir;  the  organization, 
about  the  three  million  dollars  on  organization.  I think 
that  is  true. 

Q.  You  know  there  is  a large  amount  for  organization 
expense!  A.  I think  that  is  true. 

Q.  Those  organization  expenses  were  incurred  prior 
to  the  contracts  of  1907,  were  they  not!  A.  No,  I think 
not. 

Q.  Are  you  sure  of  that!  A.  Yes,  I am  quite  sure. 

Q.  Isn’t  it  a fact  during  the  period  of  rehabilitation 
there  was  a net  disappearance  of  physical  property 
amounting  to  over  fourteen  million  dollars!  A.  I don’t 
remember  just  the  figures.  I think  that  is  in  the  record 
before  the  Commission. 

Q.  Mr.  Snyder  testified  $14,700,000!  A.  That  is 
probably  correct,  if  that  is  his  statement. 

Q.  Yes.  In  this  purchase  price  there  is  also  included 
several  million  dollars  for  pavement!  A.  Yes,  sir. 

Q.  That  the  city  claims  title  to!  A.  Yes,  sir. 

Q.  Also  over  $1,000,000,  or  about  $1,000,000  for  bridges 
that  belong  to  the  city,  that  is  true,  isn’t  it!  A.  Yes, 
the  amount  of  money  that  we  put  into  this — 

Mr.  Sheean:  Tf  the  Commission  please — 

Chairman  Wilkerson:  If  it  is  not  cross-examination, 
object. 

Mr.  Cleveland:  Now,  are  the  facts,  Mr.  Blair,  that 
these  matters, — these  elements  that  I have  mentioned, 
are  they  taken  into  consideration,  so  far  as  you  know  in 
determining  whether  or  not  loans  would  be  made  to  you! 
A.  The  valuation  of  the  properties  as  existing  today  is 


219 


considered  of  course,  as  the  valuation  of  the  property  as 
represented  on  the  books,  is  $158,000,000  or  $160,000,000. 

Q.  Now,  in  your  discussion,  in  regard  to  making  your 
other  loans,  was  the  question  of  the  length  of  time  that 
your  franchises  have  yet  to  run,  taken  into  considera- 
tion? A.  The  bankers  are  familiar  with  that. 

Q.  They  know  that  provision?  A.  Yes. 

Q.  That  was  considered?  A.  Yes,  sir. 

Q.  Now,  what  you  need  at  the  present  time  is  addi- 
tional capital,  isn’t  it?  A.  Yes,  sir. 

Q.  And  what  you  are  asking  the  Commission  to  do  is 
to  give  rates  that  will  produce  that  additional  capital 
and  enable  you  to  make  the  extensions?  A.  No,  I am 
not  doing  that  at  all. 

Q.  What  are  you  doing,  what  is  your  position?  A. 
We  are  asking  the  Commission  to  give  a credit  on  which 
we  can  go  to  the  bankers  and  borrow  money  and  put  it 
into  the  property,  and  a rate  that  is  sufficient  to  take  care 
of  the  fixed  charges  for  the  new  money. 

Q.  Merely  want  a rate  to  cover  the  increased  rate 
of  interest  providing  you  can  get  the  money?  A.  Yes, 
actual  cost. 

Q.  You  made  the  statement,  you  concurred  in  the  state- 
ment made  by  these  other  gentlemen.  You  know  that 
the  money  conditions,  that  the  money  tightness  is  some- 
thing that  is  in  existence  all  over  the  country,  isn’t  it, 
Mr.  Blair?  A.  Yes,  sir. 

Mr.  Cleveland:  I think  that  is  all,  Mr.  Blair. 

Chairman  Wilkerson:  Call  the  next  witness. 


220 


Charles  G.  Dawes  testified  as  follows : 

Mr.  Dawes:  Before  I am  examined  I would  like  to 
make  this  statement  to  the  Commission.  I do  not  know 
what  form  this  cross-examination  of  mine  will  take, 
whether  it  will  take  the  form  so  familiar  to  you  of  chasing 
up  a blind  alley,  and  personalities  on  these  questions, 
or  not,  but  I want  to  state  to  the  Commission  I am  ready 
to  answer  any  questions  in  relation  to  my  personal  in- 
terest in  the  properties  and  in  the  situation,  anything 
of  that  sort  to  the  fullest  extent.  My  statements,  when 
I was  on  the  stand  here  the  other  day  that  I would  not 
submit  or  at  any  rate  would  not  desire  to  submit  to  ques- 
tions designed  to  show  personal  interest  was  simply  be- 
cause I did  not  think  it  was  material  and  I did  not  want 
my  personal  matters  to  interfere  with  this  matter,  but 
I will  say  I hope  they  do  go  into  personal  matters  in 
reference  to  this,  and  I will  say  I want  to  have  the  priv- 
ilege of  making  a statement  as  to  the  effect  upon  this 
business  proposition  of  the  injection  of  politics  and 
demogogy,  and  I want  to  make  another  statement  in  con- 
nection with  it. 

Chairman  Wilkerson : All  right,  proceed. 

Cross-Examination  by  Mr.  Cleveland. 

Q.  General,  how  long  since  you  are  in  politics?  A. 
About  twenty  years.  ’ 

Q.  You  graduated  from  that  to  be  a banker  and  pro- 
moter and  owner  of  public  utilities,  is  that  right?  A. 
Yes,  that  is  right. 

Q.  As  a banker,  is  it  your  opinion  that  one  of  the 
prime  requisites  of  getting  a loan  is  to  have  property 
that  will  secure  the  principal?  A.  That  is  one  of  the 
prime  requisites,  yes,  sir. 


221 


Q.  And  good  title  to  the  property  is  another,  is  it  not? 
A.  Yes,  sir,  freedom  from  demogogic  attacks  and  others. 

Q.  Yes.  Even  by  representatives  of  banks  and  public 
utilities?  A.  Yes,  that  is  right. 

Mr.  Cleveland:  That  is  all.  General. 

A.  I would  like  the  privilege  of  just  reading  a state- 
ment along  that  line,  because  I have  been  putting  in  some 
time  this  week  investigating  just  what  was  the  financial 
effect  of  the  dragging  of  this  question  into  politics.  This 
is  a business  question  and  I am  interested  as  a citizen 
as  well  as  a small  owner  of  bonds. 

Chairman  Wilkerson:  You  may  proceed. 

Mr.  Cleveland:  I might  suggest — Is  this  an  argu- 
ment ? 

A.  This  is  argument  based  upon  figures,  and  I want 
to  be  cross-examined  on  the  argument. 

Mr.  Cleveland:  I think  the  argnment  of  the  general 
ought  to  take  place  among  other  counsel. 

A.  I don’t  care.  Let  us  get  at  the  truth.  Let  me 
be  called  counsel  without  compensation,  which  is  a dif- 
ferent situation  from  that  which  the  gentlemen  on  the 
other  side  represent.  It  does  not  make  any  difference 
what  you  call  me.  Let  us  get  at  the  facts. 

Mr.  Cleveland:  Let  us  finish  up  with  the  witnesses. 
Why  should  the  general  make  a speech  ? 

Chairman  Wilkerson:  You  are  here  all  the  time.  We 
can  hear  you.  He  is  only  here  infrequently. 

A.  I want  you  to  cross-examine  me  because  I put 
some  work  in  on  this  thing. 

Mr.  Cleveland:  I hope  you  will  say  something  this 
time  that  is  worth  cross-examining  you  about. 

A.  I hope  so.  Let  us  see  if  I have. 

The  serious  situation  as  to  street  railway  transporta- 


222 


ton  into  which  the  politicians  of  the  City  of  Chicago  have 
thrust  its  people  by  demagogery,  claimed  to  be  in  the 
people’s  interests.,  is  difficult  to  overstate.  The  time  is 
approaching  when  business  men  must  give  some  atten- 
tion to  unmasking  political  hypocrites  and  carry  the  fight 
of  reason  against  them  to  a public  which  they  are  misrep- 
resenting. It  should  not  be  difficult  to  explain  to  the 
ordinary  man  that  a great  business  like  the  transporta- 
tion of  a city  should  be  settled  as  the  business  interests 
of  the  city  demand  and  not  in  the  political  interests  of 
those  who  temporarily  happen  to  be  in  control  of  the 
administration.  If  he  understands  in  addition  what  is 
the  fact  that  under  a plea  of  saving  him  money  on 
street  car  fares,  the  methods  advocated  by  the  city  will 
greatly  increase  the  cost  and  lessen  the  efficiency  of  the 
service,  he  will  be  more  apt  to  retain  a permanent  inter- 
est in  the  matter. 

The  fare  grabbers,  plutocrats,  and  sinister  interests  in 
the  Chicago  street  car  situation,  using  the  vernacular  of 
the  city  politicians,  are  the  unfortunate  scattered  holders 
of  the  secondary  obligations  of  the  surface  lines  which 
represent  an  agreed  upon  valuation  arrived  at  after  long 
negotiations  between  the  roads  and  the  city  in  1907.  The 
market  value  of  these  secondary  obligations  before  the 
city  administration  put  the  blight  of  politics  upon  a busi- 
ness question  was  $65,935,025  which,  even  at  those  fig- 
ures, represented  a large  loss  upon  the  securities  of  the 
old  street  car  systems,  which  they  were  issued  to  repre- 
sent. 

But  now  that  this  great  business  question  of  trans- 
portation has  been  dragged  into  politics,  the  market  value 
of  the  secondary  securities  is  $24,487,810,  representing 
a Fall  in  the  market  of  $41,447,215.  The  annual  income, 


223 


out  of  $43,000,000  gross  income,  now  paid  the  holders  of 
these  secondary  securities  of  the  Chicago  Surface  Lines, 
is  about  $3,200,000  per  year,  Chicago  Railways  Company 
$2,069,188,  and  the  Chicago  City  Railway  Company, 
$1,200,000. 

According  to  the  reports  of  the  experts  employed  by 
the  city  to  testify  before  this  Commission,  as  I noticed  in 
the  Daily  News  of  May  7th— I don’t  know  whether  these 
figures  take  in  the  Chicago  City  and  Connecting  Railroad 
or  not,  it  does  not  make  any  difference,  I draw  my  state- 
ment broad  enough  to  cover  that — according  to  the  re- 
ports of  the  experts  employed  by  the  city  to  testify  be- 
fore this  C/ommission,  as  T noticed  in  the  Daily  News  of 
May  7th,  they  estimate  that  the  valuation  of  the  roads 
should  be  cut  $43,546,409,  which  surprisingly  approxi- 
mates the  value  which  the  city  once  agreed  was  inherent 
in  the  secondary  securities.  But  by  whatever  process 
it  may  be  attempted,  let  us  assume  that  the  politicians 
have  succeeded  in  destroying  all  the  interest  of  the  pres- 
ent secondary  security  holders  s.o  that  they  will  no  longer 
be  able  to  run  this  business  question  up  a blind  alley  in 
the  minds  of  unthinl^ing  people  by  demagogic  attacks 
upon  the  secondary  security  holders. 

With  this  $3,200,000  per  year  income  wiped  out,  it 
would  be  no  longer  possible  to  represent  these  unfortun- 
ate security  holders  as  fare  grabbers,  plutocrats,  and 
sinister  interests  and  as  responsible  for  everything  with 
which  the  people  are  dissatisfied  in  the  street  car  service. 
Let  us,  therefore,  mthout  discussing  any  question  of 
public  policy  or  public  morals  which  is  involved  in  this 
attempt,  consider  the  situation  which  the  public  con- 
fronts now  in  regard  to  improving  the  city  transporta- 
tion, remembering  that  the  ruin  of  the  secondary  security 


224 


holders,  if  accomplished,  will  only  intensify  the  distrust 
of  new  capital  when  invited  to  contribute  the  means  nec- 
essary to  rehabilitate  the  roads. 

Even  now,  under  these  political  attacks,  the  first  mort- 
gage bonds  of  the  surface  lines,  which  is  the  only  source 
of  the  new  money  supply  for  rehabilitation,  are  selling 
on  about  a 14  to  15  per  cent,  basis.  In  these  times  of 
credit  stringency  the  railroads  and  other  public  utilities, 
not  being  attacked  by  the  demagogues,  are  having  to  pay 
as  high  as  seven  and  eight  per  cent,  for  their  money,  and 
much  of  it  is  not  as  well  secured  actually  as  are  the  first 
mortgage  bonds  of  the  Chicago  Surface  Lines.  The  dif- 
ference between  a seven  per  cent,  interest  rate  and  about 
a 14  per  cent,  interest  rate,  to  wit:  seven  per  cent.,  is 
the  financial  measure  of  the  effects  of  the  fight  of  the 
demagogues  upon  the  street  car  situation. 

The  testimony  of  Mr.  Blair  and  the  experts  is  that  the 
Chicago  Surface  Lines  need  $10,000,000  to  $15,000,000 
immediately,  and  probably  $10,000,000  per  year  for  the 
next  10  years,  to  keep  them  in  shape  to  properly  per- 
form the  service  which  the  public  demands.  In  other 
words,  even  if  the  income  of  the  secondary  security  hold- 
ers of  the  Chicago  Surface  Lines,  amounting  to  $3,200,000 
annually,  were  confiscated,  an  extra  annual  charge  of 
$700,000  to  $1,000,000  in  addition  to  ordinary  rates  for 
money,  would  have  to  be  imposed  upon  the  people  to  get 
the  means  immediately  necessary  for  the  roads,  and 
$700,000  additional  each  year  thereafter  to  provide  the 
money  necessary  to  keep  them  up.  Within  about  four 
years  the  entire  annual  income  forced  away  from  the 
secondary  security  holders  would  have  been  dissipated 
in  the  extra  cost  of  capital  to  the  roads  alone.  And 
this  would  be  done  in  the  name  of  the  interests  of  the 
people. 


225 


Let  no  one  deceive  themselves  as  to  this.  You  pos- 
sibly might  confiscate  the  old  property  of  the  Chicago 
Surface  Lines,  but  old  property  will  not  rehabilitate  the 
lines.  New  money  must  be  invited  into  the  enterprise. 
In  a city  where  political  attacks  have  brought  the  mar- 
ket price  of  the  Chicago  Surface  Lines  first  mortgage 
bonds  down  from  98  and  99  to  between  60  and  65  in  a 
few  years,  new  capital  will  not  consent  to  put  its  neck 
into  the  noose  a second  time  without  charging  heavily 
for  it. 

I do  not  believe  that  even  a 15  per  cent,  rate  would 
secure  this  money  based  upon  conditions  which  have 
existed  for  the  last  two  years  in  the  City  of  Chicago. 
The  question  is  immediately  raised  whether  the  politic- 
ians have  not  already  made  it  impossible  for  the  Chicago 
public  ever  to  have  a satisfactory  street  car  service 
which,  at  the  same  time,  will  operate  under  a reasonable 
expense  to  them.  The  political  slogan  of  a five  cent  fare 
is  too  popular  to  be  readily  abandoned. 

Having  made  the  operation  by  private  companies  un- 
der reasonable  rates  impossible,  it  would  seem  to  be  the 
policy  of  the  city  government  to  take  over  the  property 
at  confiscatory  prices  if  possible,  and  then  to  conceal  the 
inevitable  increase  in  the  cost  of  transportation  to  the 
public  by  taking  a part  of  it  from  them  in  the  shape  of  a 
five  cent  fare  and  the  balance  in  the  shape  of  heavier  gen- 
eral or  special  taxes.  The  total  confiscation  of  the  in- 
terest of  the  secondary  security  holders,  with  the  moral 
injury  to  the  community  ignored,  would  not,  in  my  judg- 
ment, save  the  public  one-half  what  these  politicians 
and  their  methods  will  lose  it. 

The  proper  solution  of  the  question,  of  course,  would 
be  the  restoration  of  the  general  credit  of  Chicago  public 


226 


utilities  under  the  State  Commission  which  would  enable 
new  capital  to  be  secured  for  the  roads  upon  a reasonable 
basis  so  that  under  the  control  of  the  Commission  they 
would  be  operated  at  the  least  possible  cost  to  the  public 
with  the  best  possible  service.  But  the  restoration  of 
credit,  even  with  a strong*  Commission  as  this  one  is,  can 
never  occur  until  the  attacks  of  the  city  demagogues 
cease,  and  I,  for  one,  see  little  hope  for  such  an  occur- 
rence in  the  City  of  Chicago.  I can  only  reaffirm  my 
statement  in  my  former  examination  that  the  dema- 
gogues who  have  brought  into  politics  this  great  question 
of  city  transportation,  are  the  real  enemies  of  the  people 
who  would  place  under  heavy  sacrifice  the  interests  of 
their  city  and  the  public  for  their  own  petty  and  tempo- 
rary political  advantage. 

That  is  all. 

Mr.  Cleveland : General,  where  do  you  live  ? 

A.  I live  most  of  my  time  down  here  in  the  loop  and 
part  of  the  time  in  Evanston.  I am  a non-resident  of 
Evanston,  Illinois,  mixing  in  this  question  because  I hap- 
pen to  be  in  business  in  the  City  of  Chicago  and  travel 
on  its  lines,  and  I put  some  money  in  the  Street  Rail- 
ways Company  and  would  like  to  get  it  back. 

Q.  How  many  securities  do  you  own  directly!  A. 
$10,000  of  the  Chicago  Railway  Company  bonds,  which 
I paid  $5,000  for,  and  I think  they  are  worth  $2,000. 

Q.  Is  your  bank  interested  in  any  bonds!  A.  Yes. 
I brought  over  a list  to  show  just  whaf  the  bank  has 
got  here.  Shall  I read  this  out! 

Q.  Yes,  please.  A.  Well,  we  have  got  in  the  banks 
that  stand  on  our  books,  $728,150  of  all  kinds  of  these 
securities,  mostly  the  first  mortgage.  That  is  what  we 


227 


carry  them  at.  Unfortunately  that  is  not  what  they  cost. 
I would  like  to  see  them  increased  in  price  too.  We 
invested  the  money  on  a business  basis  at  a reasonable 
assurance,  we  thought,  of  having  it  safe. 

Q.  Yes.  At  the  time  you  bought  those  bonds  you 
supposed  that  the  contracts  of  1907  were  valid  and  bind- 
ing contracts!  A.  Oh,  we  supposed  we  were  buying 
them  simply  subject  to  the  ordinary  risk,  and  not  a raid 
on  the  properties  by  politicians. 

Q.  Well,  you  assumed  that  the  contracts  were  valid 
and  binding  contracts,  did  you  not!  A.  We  assumed  the 
security  was  good  security.  Yes  we  assumed  that  the 
contracts  were  valid  and  binding. 

Q.  You  assumed  that  the  contracts  of  1907,  were  valid 
and  binding  contracts,  didn’t  you!  A.  I assumed  so, 
yes.  Yes,  we  assumed  that. 

Q.  Before  you  took  these  bonds  didn’t  you  have  a 
legal  opinion  to  the  effect  that  these  contracts  were  valid 
and  binding  contracts!  A.  No,  we  bought  them  in  the 
open  market.  We  were  not  relying  on  the  bond  sellers 
and  so  forth. 

Q.  Yes.  Now,  these  contracts  were  known  as  the 
settlement  ordinances,  were  they  not!  A.  Yes. 

Q.  The  Surface  Lines  were  taken  out  of  politics  then, 
were  they  not,  and  stayed  out  of  politics  until  the  sum- 
mer of  1918,  didn’t  they!  A.  Well,  I was  away  in  1918. 
I don ’t  know. 

i 

Q.  Well,  Mr.  Joseph  E.  Otis  was  connected  with  your 
bank  at  that  time!  A.  Yes. 

Q.  Do  you  know  he  was  named  as  one  of  the  trustees 
under  that  ordinance  of  1918!  A.  No,  I did  not. 

Q.  You  did  not  know  that!  A.  I did  not  know  that. 


228 


Q.  Did  you  know  that  the  first  start  to  bring  this  ques- 
tion into  politics  was  in  connection  with  the  submission 
of  that  ordinance  to  a referendum  vote  before  the  people 
in  November,  1918!  A.  No,  I was  in  Prance  in  Novem- 
ber, 1918,  and  did  not  know  anything  about  it.  Some- 
thing happened,  I noticed,  to  the  bonds  in  the  two  years 
I was  away. 

Q.  Yes.  But  you  know  that  that  matter  was  submitted 
to  the  people!  Y^ou  have  learned  that,  that  ordinance!  A. 
Well,  I am  very  sorry  to  say  I never  knew  it  was  sub- 
mitted to  the  people.  I did  not  know  anything  that  went 
on  over  here. 

Q.  You  do  not  know  that  the  Surface  Lines  maintained 
a political  bureau  for  the  purpose  of  getting  the  ap- 
proval of  the  people  to  that  ordinance,  you  did  not  know 
that!  A.  No,  I did  not  know  that. 

Mr.  Sheean:  There  has  no  proof  been  offered  at  any 
time  in  any  hearing  of  that. 

Mr.  Cleveland:  Of  what! 

Mr.  Sheean:  Of  what  you  say  is  a fact. 

Mr.  Cleveiand:  Oh,  yes,  there  is. 

Mr.  Sheean:  At  what  page! 

Mr.  Cleveland:  We  had  a man  from  the  Association 
of  Commerce.  He  testified  that  the  Surface  Lines  paid 
$8,000  or  $9,000. 

Mr.  Sheean:  And  what  was  your  question,  sir,  that 
the  Chicago  Surface  Lines  maintained  a bureau! 

Mr.  Cleveland:  Yes. 

Mr.  Sheean : And  now  you  say  that  you  meant  to  say 
that  we  contributed  a small  sum  to  the  Chicago  Assoc- 
iation of  Commerce,  total  expense! 


229 


Mr.  Cleveland:  I proved  by  one  of  the  witnesses  this 
morning 

Mr.  Sheean:  If  that  is  what  you  mean  by  this  state- 
ment— 

A.  That  is  the  trouble  with  the  whole  question,  you 
run  up  a blind  alley.  What  have  I to  do  with  that  I 

Mr.  Cleveland:  You  are  talking  about  bringing  it  in 
politics,  and  I am  trjdng  to  show  you  it  was  brought  in 
by  the  Surface  Lines. 

A.  My  argument  is,  take  it  out  of  politics.  You  are 
spending  $400,000  a year,  as  I understand  it. 

Q.  Is  it  your  idea  that  these  Surface  Lines  and  Ele- 
vateds should  be  in  their  respective  spheres,  should  be 
monopolies?  A.  Sure  they  should  be,  natural  monop- 
olies. 

Q.  Not  natural  monopolies,  governmental  monopolies, 
are  they  not?  A.  Yes,  they  should  be  governmental  mo- 
nopolies. In  my  judgment  you  have  a condition  in  force 
now  where  the  only  solution  of  this  thing  is  for  the  peo- 
ple to  take  them  over. 

Q.  Do  you  think  public  ownership  is  the  only  solu- 
tion? A.  It  seems  to  me  that  is  the  tremendous  pen- 
alty that  is  going  to  be  put  on  the  people  because  you 
have  attacked  these  properties.  Even  the  Commission 
could  not  pay  any  set  of  rates  permanently  with  these 
attacks  continuing,  and  you  could  not  set  a basis  of  rates 
high  enough  and  still  the  people  would  travel.  You  have 
attacked  these  roads  until  now  to  get  new  money  into  it 
costs  14  per  cent.  How  can  the  Commission  under  those 
attacks  raise  the  fares  to  the  people  of  Chicago  high 
enough  to  pay  for  themselves.  If  you  take  it  and  impose 
taxation,  that  is  the  way  you  will  have  to  do  it,  and  you 


230 


mil  say  to  the  people  you  have  a five  cent  fare.  That  is 
the  scheme,  so  far  as  I can  see. 

Q.  This  being  a matter  of  public  regulation,  being 
a monopoly,  do  I understand  you  agree  it  should  be  a 
matter  of  public  regulation.  A.  Certainly. 

Q.  Now,  being  a matter  of  public  regulation,  the 
manner  and  method  would  be  a matter  of  public  dis- 
cretion? A.  Certainly,  reasonable  and  sensible  public 
discretion,  not  personalities.  Get  it  down,  if  you  want 
to  talk  about  it  on  a business  basis,  let  us  go  ahead  and 
talk  about  it.  Put  me  down  as  interested,  a sinister,  a 
preacher  of  Wall  street,  anything  you  please. 

Mr.  Cleveland:  I will  tell  you  what  I will  do  for  you, 
I will  arrange  for  a debate  before  the  people 

Chairman  Wilkerson:  Well,  not  here. 

Mr.  Cleveland:  I quite  approve  of  that. 

Q.  Now,  General,  on  the  subject,  as  long  as  the  mat- 
ter is  fairly  discussed  and  the  facts  are  stated  to  the 
people,  that  you  would  consider  as  properly  legitimate 
discussion,  wouldn’t  3^ouf  A.  M^hy,  certainly,  an  argu- 
ment on  the  square. 

Q.  On  the  square?  A.  Yes. 

Q.  On  the  square?  A.  Yes. 

Q.  And  in  that  sense  and  in  any  sense  these  utilities 
necessarily  must  be  in  politics  so  long  as  they  are  sub- 
ject to  public  regulation,  isn’t  that  true?  A.  Not  poli- 
tics in  the  sense  that  you  use  the  word  and  act  upon  it. 

Q.  I use  politics  in  the  sense  of  serving  the  people? 
A.  Yes. 

Q.  You  may  disagree  with  us  as  to  whether  we  are 
doing  it  but  that  is  what  we  think  we  are  doing.  lu 


231 


that  sense,  it  is  proper  they  should  be  in  politics!  A. 
In  that  sense  it  is  proper  everything  should  be  in  poli- 
tics— ^with  the  public  interests. 

Q.  With  the  public  interests!  A.  Yes  sir,  absolutely. 

Q.  Now,  you  have  been  in  utility  business  a great 
deal.  Isn’t  it  a fact  that  throughout  the  history  of  this 
state,  there  has  been  public  ownership  of  public  utilities 
of  one  kind  or  another  ! A.  Do  you  mean  where  the 
municipalities  own  them. 

Q.  Yes,  sir.  A.  I do  not  know  as  to  Illinois. 

Q.  You  know  in  Chicago  they  own  the  water  works, 
don’t  they!  A.  Oh,  yes.  I thought  you  meant  street 
railways. 

Q.  Yes.  You  know  recently  in  Lake  Forest  they 
changed  from  private  ownership  of  water  works  to  pub- 
lic ownership  of  water  works,  do  you  not!  A.  Yes. 

Q.  You  know  that  it  has  frequently  happened  through- 
out that  gas  light  companies,  that  electric  light  compa- 
nies and  power  companies  have  been  owned  by  the  munic- 
ipalities! A.  Yes.  Seattle  has  just  taken  over  the  street 
car  lines. 

Q.  Yes.  A.  I would  like  to  put  in  here,  if  I could, 
what  Ole  Hansen  says  about  it. 

Q.  If  you  will  let  me  put  in  what  other  people  said 
I will  be  glad  to  let  you  put  in  what  Ole  said,  because 
Ole  seems  to  be  on  the  minority  of  the  subject,  according 
to  the  reports  we  get  from  Seattle.  A.  He  won’t  be 
long  if  they  lose  as  much  next  year  as  this. 

Q.  The  question  of  public  or  municipal  ownership  is 
not  a question  of  a general  rule,  is  it,  so  much  as  a ques- 
tion to  be  applied  in  reference  to  the  particular  utility 
and  locality,  isn’t  that  true!  A.  Certainly. 


232 


Q.  So  that  each  utility  would  have  to  be  taken  up  on 
its  own  merits,  and  in  view  of  the  peculiar  circumstances 
surrounding  it.  A.  Absolutely,  yes,  sir. 

Q.  Now,  do  you  know  what  rate  of  fare  they  have  at 
Seattle!  A.  I do  not,  no. 

Q.  Have  you  investigated  into  the  situation  there 
more  than  to  read  what  Ole  said,  and  to  get  the  quota- 
tions of  their  bonds!  A.  Yes,  I investigated  the  situa- 
tion there  in  connection  with  the  securities  of  the  road 
prior  to  the  time  the  city  took  them  over  and  knew  some- 
thing of  the  difficulty  they  were  having.  It  is  something 
similar  to  the  difficulties  of  our  street  car  system.  Some- 
body told  me  today,  I do  not  know  who  it  is,  that  the 
deficit  this  year  that  the  city  has  to  pay  is  $900,000.  I 
will  look  that  up. 

Q.  Now,  General,  as  a matter  of  fact. A.  They 

put  that  in  the  general  taxation,  whatever  the  deficit  is. 
They  have  credit  for  a lower  fare  among  some  people, 
I suppose. 

Q.  The  question  of  the  money  conditions  that  are 
prevailing  now  are  not  local  to  Chicago!  A.  Not  at  all, 
and  I covered  that  in  putting  eight  per  cent,  rate  there, 
and  I tell  you  now  that  I put  that  seven  per  cent,  too 
low  for  this  street  car  situation  here.  I do  not  believe 
you  can  get  it  at  all.  You  have  ruined  the  credit. 

Q.  You  think  they  are  about  at  the  end  of  the  rope, 
so  far  as  getting  money  is  concerned!  A.  I think 
they  are  about  at  the  end  of  the  rope.  If  you  are  going 
to  help  the  people  by  taking  them  over,  let  us  see,  that 
is  unless  the  Commission  can  save  them. 

Q.  What  would  you  suggest  the  Commission  can  do! 

A.  I am  a pessimist.  The  Commissioners  certainly 


233 


could  not  raise  fares  high  enough  to  put  new  capital  on 
the  road.  It  is  a question  of  fact.  It  is  a business  con- 
dition. Where  are  you  going  to  get  it?  Will  you  get 
our  bank  and  the  Illinois  Trust  and  Savings  Bank  and 
the  other  banks  which  have  had  a 33  per  cent,  reduction 
in  the  price  of  the  first  mortgage  bonds,  take  chances  of 
buying  at  15  per  cent.,  at  which  they  would  have  to  be 
put  out,  subject  to  the  attacks  as  to  the  five  cent  fare 
and  this  and  that  that  a hostile  city  administration  want 
to  bring  up  all  the  time?  You  have  run  these  roads  into 
that  condition  where  it  may  be  necessary  for  the  City  of 
Chicago,  or  the  people,  to  take  them  over  and  put  into 
the  general  taxation  what  should  come  out  of  reasonable 
and  proper  business  administration. 

Q.  You  will  get  me  swelled  up  and  burst  if  you  attrib- 
ute to  me  so  much  power.  A.  You  spent  $400,000  last 
year  out  of  the  traction  fund  to  put  the  road  in  this  shape 
at  the  expense  of  the  people.  A man  can  take  a dynamite 
bomb  and  put  it  under  a building  and  swell  up  because 
it  blows  up. 

Q.  Now,  General,  do  the  same  conditions  that  you  have 
stated  about  the  surface  lines  apply  to  the  elevated  rail- 
road? A.  I do  not  know  so  much  about  the  elevated  rail- 
road. I do  not  pose  as  an  expert  on  elevated  railroads, 
or  the  telephone  company.  I have  not  looked  into  that. 
I have  looked  into  the  Chicago  Surface  Lines.  I worked 
about  three  years  trying  to  get  this  railroad  situation 
into  shape,  and  I incidentally  will  say  I was  paid  I think 
out  of  that  three  years  work,  I got  $5,000,  then  I was  trus- 
tee of  the  Chicago  Railways  for  three  years,  and  gave 
up  a contract  for  $5,000  at  the  end  of  two  years,  because 
I did  not  think  I could  give  service,  but  I have  some  in- 


234 


formation  from  three  years’  work,  practically  without 
compensation,  on  this  Chicago  Surface  Lines  situation. 

I was  trjdng  to  build  up  something,  not  tear  it  down. 

Q.  The  Surface  Lines  have  got  to  have  new  capital, 
don’t  they?  A.  They  certainly  have. 

Q.  As  you  understand  it,  the  service  at  the  present 
time  is  absolutely  inadequate  to  meet  the  needs  of  the 
people?  A.  Yes,  sir. 

Mr.  Cleveland:  I think  that  is  all. 

Commr.  Lucey : Just  one  question  so  that  we  will  clear 
the  decks  here  a little,  general.  You  said  the  only  solu- 
tion you  saw  was  the  taking  over  by  the  municipality  of 
the  roads? 

A.  Unless  the  credit  of  these  roads  can  be  established 
in  some  way,  re-established  under  this  Commission.  It 
would  be  the  greatest  calamity  to  the  people  of  the  City 
of  Chicago,  to  put  these  street  car  systems  into  the  hands 
of  these  people  with  every  member  of  the  City  Council 
constituting  himself  a committee  of  one  to  have  an  ex- 
tension into  his  section  of  the  town.  Why,  look  at  the 
expense  they  are  at  now  out  of  their  traction  fund,  in 
connection  with  fighting  these  properties,  and  all  this 
sort  of  thing?  Look  at  the  losses.  I have  here,  if  you 
would  like  to  see  it,  what  money  they  are  paying  to  ex- 
perts and  counsel. 

Chairman  Wilkerson:  We  have  that. 

A.  Yes.  Imagine  this  business  proposition  in  the 
hands  of  such  men. 

Commr.  Lucey:  I just  wanted 

I 

Mr.  Cleveland:  Just  pardon  me. 

A.  Somebody  has  to  pay  for  it. 


235 


Q.  Do  you  happen  to  know,  general,  how  much  the 
Chicago  Surface  Lines  paid  their  experts  for  giving  the 
reproduction  new  valuation  without  depreciation  of  their 
property?  A.  No,  I do  not  know  that. 

Q.  You  might  he  interested  to  know  that  it  is  $166,000. 
A.  From  these  figures  I have  here  you  are  paying  some- 
thing like  $400,000  to  carry  on  this  thing  for  special  coun- 
sel and  special  commission  and  so  on. 

Q.  How  much  has  been  spent!  A.  I do  not  know. 
That  is  estimated.  Somebody  says  this  goes  for  that 
amount  and  this  amount,  for  what  I consider  indifferent 
service,  but  what  is  the  use  I What  on  earth  has  that  got 
to  do  with  this  question  of  reasonable  settlement  of  this 
business  question! 

Q.  You  said  I was  giving  such  indifferent  service,  just 
a little  while  ago  you  dragged  me  way  up.  A.  You 
are  doing  very  good  service  as  a destructive  agent. 

Q.  I do  not  want  you  to  minimize  my  service,  gentle- 
men, I would  not  like  that. 

Commr.  Lucey : I wanted  to  ask  again,  following  your 
statement,  Greneral,  that  the  meaning  of  the  question  was 
that  if  the  plant  was  taken  over  by  the  municipality,  that 
it  would  result  in  some  of  these  payments  being  made 
out  of  general  taxation,  and  not  all  from  the  fare,  which 
Mr.  Cleveland  insists  that  the  contract  calls  for,  at  the 
five  cent  fare. 

• A.  Yes. 

Commr.  Lucey : There  would  be  no  possibility  of  oper- 
ating these  roads  in  your  opinion  under  municipal  owner- 
ship in  a more  economical  manner  than  operated  now! 

A.  In  more  economical  manner,  certainly  not,  mercy! 


236 


Mr.  Cleveland:  General,  you  studied  this  plan  about 
municipal  ownership  a great  deal,  haven’t  you? 

A.  What  particular  plan  ? 

Q.  The  pending  plan.  A.  No,  I have  not  studied  the 
pending  plan,  except  in  a very  general  way. 

Q.  You  understand  that  the  city  is  going  to  do  this 
work,  don’t  you?  A.  Why  the  only — I am  just  back; 
and  the  only  discussion  I had  of  the  plan,  which  was  upon 
a reasonable  basis,  that  is,  where  men  get  down  to  talk 
like  man  to  man,  was  a talk  to  Mr.  Keehn  going  to  New 
York  the  other  night. 

Q.  Mr.  Sheean,  do  you  mean?  A.  No,  Mr.  Keehn 
of  the  Hearst  paper. 

Q.  Oh,  yes.  A.  Mr.  Keehn  explained  something  of 
the  plan  of  the  city  administration  in  connection  with  the 
taking  over  of  these  properties.  Have  a five  cent  fare 
and  make  up  the  balance  by  general  and  special  taxation. 

Q.  What  did  Mr.  Keehn  think  about  it?  A.  He  said 
he  did  not  know.  He  thought  it  might  be  a good  thing 
and  I explained  to  him  it  might  be  the  only  thing  that 
was  possible. 

Q.  Yes.  A.  With  the  credit  and  the  service  ruined 
with  these  political  attacks. 

Q.  You  and  Mr.  Keehn  had  an  enjoyable  visit?  A. 
Yes,  I always  enjoy  talking  about  these  things  in  a busi- 
ness way  with  a reasonable  man. 

Mr.  Cleveland : Come  over  some  time.  General,  and  we 
will  talk  them  over. 

A.  I will  be  delighted. 

Mr.  Cleveland:  All  right,  that  is  all. 

Chairman  Wilkerson : Call  your  next,  Mr.  Bangs. 


237 


Mr.  Cleveland:  Before  he  takes  it  up,  there  is  one  mo- 
tion I think  I ought  to  make  here.  I ask  that  the  evidence 
of  each  and  every  witness  that  has  appeared  here  today, 
including  Mr.  Wheeler  and  those  that  have  been  cross- 
examined,  be  taken  and  considered  as  evidence  on  behalf 
of  the  city  in  the  surface  lines  case. 

Mr.  Sheean:  We  join  in  the  motion. 

Chairman  Wilkerson:  Make  that  motion  in  the  sur- 
face lines  case  and  we  will  rule  on  that  in  this  case. 

Mr.  Cleveland:  Don’t  we  have  to  make  it  in  the  rec- 
ord here! 

Chairman  Wilkerson : It  may  be  noted  here,  and  then 
when  you  bring  it  up  in  the  surface  lines  case  we  will 
consider  the  question. 

Mr.  Ringer:  As  I understand  the  needs  of  the  tele- 
phone company,  as  made  apparent  by  the  testimony  of 
Mr.  Sunny  in  this  present  hearing,  involved  the 
expenditure  of  about  $10,000,000',  and  you  were  told 
that  the  cost  of  that  was  about  9 per  cent,  per  annum, 
and  our  attitude  is  simply  this,  that  the  telephone  com- 
pany is  in  such  financial  condition,  as  far  as  its  present 
assets  and  incomes  are  concerned,  that  there  is  absolutely 
no  need  for  the  raising  of  any  additional  capital,  in  order 
to  meet  the  requirements  for  increased  plans,  and  there- 
fore that  question  has  no  pertinence  or  bearing  upon  the 
present  hearing. 

The  question  of  politics  does  not  enter  into  it,  so  far 
as  I am  concerned,  does  not  concern  me,  I do  not  happen 
to  know  what  precinct  I live  in,  and  I do  not  suppose 
anybody  cares. 

I have  listened  with  a great  deal  of  attention  to  the 
existing  evils.  I cannot  see  how  this  Commission  can  cure 


238 


the  ills  of  politics,  and  as  far  as  meeting  the  general  eco- 
nomic conditions  of  the  world,  as  reflected  by  the  present 
rate  of  exchange,  or  the  present  cost  of  money,  with  all 
due  deference  to  the  omnipotence  of  this  Commission  I 
would  say  they  would  have  about  as  much  influence  on 
that  as  old  King  Kanute  had  in  settling  the  seething  tur- 
bulence of  the  waves,  so  that  that  question  need  not  in- 
terest us  as  far  as  the  commission  is  concerned. 

I do  believe  the  telephone  company  is  exhibiting 
brazen  effrontery  in  coming  in  here  and  telling  you  un- 
less it  gets  this  $10,000,000,  its  subscribers  are  going  to 
suffer  very  beneficially,  and  it  should  not  take  very  long 
to  present  the  whys  and  wherefores  of  it. 

The  situation  with  reference  to  the  Chicago  Telephone 
Company  is  peculiar.  There  is  no  large  body  of  outside 
stockholders,  and  the  same  stockholding  interest  that  in- 
dulged in  the  early  profits  and  secured  the  benefit  of  the 
early  advantages  is  still  the  stockholding  body  of  that 
institution.  Some  witness  here  testified  as  to  the  gross 
iniquities  of  bringing  before  you  various  elements  in  or- 
der to  fix  rates. 

I doubt  whether  in  your  experience  you  have  ever  had 
or  will  have  as  flagrant  a presentation  of  that  element, 
reproduction  cost  new  as  we  have  here  in  the  telephone 
case  a few  days  ago,  when  a serious  demand  was  made 
that  you  allow  a return  on  $32,000,000  of  outstanding 
stock  apportioned  to  the  City  of  Chicago  upon  the  basis 
of  property  values  of  $134,000,000  working  out  by  an 
expert  engineer  of  some  standing  and  some  renown  in  the 
engineering  world  upon  that  fantastic  cost  of  reproduc- 
tion new  plan  which  contemplated  the  rebuilding  of  the 
plant,  the  destruction  of  the  old  plant,  and  added  the 
munificent  item  of  $32,000,00  for  going  value. 


239 


Mr.  Bangs:  I will  have  to  object  to  this.  I do  not 
understand  we  are  going  to  argue  the  rate  case  on  any 
theories  of  valuation.  I will  object  to  any  continuance  of 
argument  not  confined  to  this  general  hearing. 

Mr.  Ringer:  Mr.  Sunny  stated  in  this  hearing  before 
you  that  during  the  last  ten  years  there  had  been  added 
by  way  of  new  capital  $53,000,000,  or  as  he  put  it,  at  the 
rate  of  $5,300,000  per  annum. 

Now,  this  $53,000,000,  as  far  as  we  know  from  all  the 
evidence  in  this  case,  came  from  the  following  sources. 

By  way  of  new  capital $13,000,000 

By  way  of  bond  flotations  during  that  period.  14,000,000 

In  other  words 27,000,000 

of  new  money,  capital,  by  way  of  bonds  and  actual  cap- 
ital investment. 

Now,  we  all  know  where  the  rest  of  this  came  from, 
and  it  is  coming  from  the  same  source  today.  It  came 
from  that  fictitious — to  a very  large  extent — from  that 
fictitious  depreciation  reserve  account.  Mr.  Forgan  tes- 
tified here  that  that  was  largely  a bookkeeping  proposi- 
tion. It  is  not  by  any  means.  We  all  know  better  than 
that.  We  all  have  sat  here.  We  know  that  that  income 
month  after  month  which  is  coming  to  the  Chicago  Tele- 
phone Company — 

Mr.  Bangs : I will  have  to  renew  my  objection.  This 
is  no  time  or  place  to  discuss  the  case  of  the  Chicago 

Telephone  Company. 

(Colloquy  omitted.) 

Commissioner  Lucey:  Would  Mr.  Bangs  have  to  an- 
swer you  f 

Mr.  Ringer:  I presume  he  would,  but  I cannot  tell 
you  in  the  matter  of  a few  minutes  where  they  can  get  the 
$3,000,000  per  annum. 


240 


Mr.  Bangs : Of  course,  by  not  charging  any  deprecia- 
tion; that  is  his  theory,  but  let  us  discuss  that  when  we 
come  to  the  rate  case. 

Mr.  Ringer:  No;  my  contention  is  if  you  charge  your 
actual  depreciation  which  your  witnesses  have  proved 
here,  and  if  you  hold  out  part  of  that  money  which  you 
are  handing  over  to  the  A.  T.  & T.  Company  every  year, 
possibly  we  might  be  deprived  of  some  very  illuminating 
monographs  of  the  effect  of  woodpeckers  on  telephone 
poles,  and  things  of  that  kind — 

Mr.  Bangs : I will  have  to  object  to  this.  The  last 
time  the  commission  had  this  matter  under  discussion 
there  were  five  thousand  pages  of  testimony  and  several 
hundred  pages  of  briefs,  and  I do  not  want  to  go  over  that 
again. 

Mr.  Ringer  : I am  going  to  contend  with  all  serious- 
ness the  income  of  the  telephone  company  at  this  time  is 
ample  to  take  care  of  the  financial  needs,  including  the 
needs  of  the  growing  plant,  leave  them  adequate  return 
upon  their  invested  capital,  and  that  is  all  they  can  ask 
for. 

Chairman  Wilkerson : I think  these  arguments,  so  far 
as  they  relate  to  the  telephone  case,  surface  lines  case 
and  gas  case  are  more  proper  to  be  made  in  those  cases. 
Any  suggestion  which  may  be  made  on  the  general  prop- 
osition involved,  will  be  helpful.  It  semes  to  me  this  is  a 
rather  inappropriate  time  to  argue  it. 

Mr.  Ringer:  I am  looking  at  it  from  the  lawyer’s 
view  point.  My  contention  is  if  you  will  take  the  monthly 
report  of  the  Chicago  Telephone  Company,  and  if  you 
will  consider  in  connection  with  those  reports  the  knowl- 
edge that  is  already  within  your  brain  on  the  subject- 
matter,  that  you  must  find  that  the  Chicago  Telephone 


241 


Company  at  this  time  is  not  in  need  of  any  assistance 
toward  plant  increase.  That  is  the  only  point  I make  out 
about  it  all. 

Chairman  Wilkerson : Do  you  desire  to  cross-examine 
any  of  the  other  witnesses! 

Mr.  Cleveland:  There  are  only  two  more,  aren’t 
there!  Yes,  I would  like  to. 

Chairman  Wilkerson:  Do  you  have  any  more  testi- 
mony to  offer,  Mr.  Bangs! 

Mr.  Bangs : The  only  thing  I had  in  mind,  Mr.  Chair- 
man, was  the  fact  that  Mr.  Mitchell  and  Mr.  Reynolds, 
presidents  of  two  large  banks,  have  been  continually  out 
of  Chicago,  and  it  may  be  that  they  will  want  to  testify, 
or  the  Commission  will  want  to  hear  their  views  on  the 
matter.  1 think  the  Commission  itself  can  decide  that  bet- 
ter than  we  could. 

Chairman  Wilkerson : Well,  we  will  take  an  adjourn- 
ment in  this  hearing  until  the  26th  of  May.  There  is  a 
continuation  at  Springfield  next  week. 


242 


Chicago,  Illinois,  May  26,  1920. 

Parties  met  pursuant  to  adjournment. 

Present:  Same  as  before. 

Chairman  Wilkerson:  You  may  proceed,  Mr.  Dun- 
baugh,  with  the  general  hearing,  if  you  have  any  further 
evidence. 

Mr.  Dunbaugh : Mr.  Reynolds  is  here,  Mr.  Chairman, 
and  he  wants  to  make  a statement. 


George  M.  Reynolds,  being  first  duly  sworn,  testified  as 

follows : 

Chairman  Wilkerson : Give  your  full  name  to  the  re- 
porter, please? 

A.  George  M.  Reynolds. 

Q.  Residence,  Chicago,  Illinois?  A.  Chicago,  Illinois. 

Mr.  Dunbaugh : State  your  connection  with  the  Conti- 
nental & Commercial  Bank,  Mr.  Reynolds,  and  then  pro- 
ceed to  answer  the  questions  which  you  have  seen,  that 
have  been  asked  of  the  other  bankers. 

A.  I am  president  of  the  Continental  & Commercial 
National  Bank.  I had  not  seen  those  questions  until  I 
came  in  here,  and  they  were  handed  to  me  a moment  ago. 

Answering  the  first  question,  I should  say  at  the  pres- 
ent time  it  is  almost  an  impossibility  to  secure  funds  for 
the  use  of  public  utilities  due  to  two  distinct  causes.  One 
is  because  of  the  tightness  of  money  to  begin  with;  we 
are  passing  through  a period  of  overextension  of  credit, 
— and  are  trying  to  retrench  and  reduce  the  loans  of  the 
country.  That,  of  course,  makes  one  serious  handicap, 
and  it  applies  alike  to  the  public  service  corporations  or 


243 


other  kinds  of  corporations  that  need  to  borrow  money 
at  this  time. 

In  other  words,  to  amplify, — as  a result  of  the  war 
there  is  such  an  overextension  of  credit  that  the  Federal 
Eeserve  Bank  at  Washington  is  making  very  strenuous 
efforts  to  reduce  loans. 

To  make  it  more  clear,  I can  say  from  the  first  of  June 
of  last  year  to  the  30th  of  April,  this  year,  there  has  been 
an  increase  in  the  loans  made  by  the  banks  of  the  United 
States  to  the  various  commercial  enterprises  of  the  coun- 
try of  approximately  $2,000,000,000,  and  that  already  on 
top  of  what  was  then  regarded  as  a very  large  amount 
of  loans,  a rather  over  extended  condition.  I amplify 
that  for  the  reason  that  I want  to  impress  upon  you  the 
fact  that  just  so  far  as  the  conditions  for  the  moment  are 
concerned,  they  apply  alike  to  all  kinds  of  borrowers,  and 
banks  are  obliged  under  these  conditions  to  restrict  their 
loans  to  the  things  that  must  be  taken  care  of  to  further 
commerce  and  prevent  failures  and  maintain  public  con- 
fidence. 

However,  so  far  as  the  first  question  is  concerned  rela- 
tive to  rates,  will  say  that  seven  per  cent,  rate  is  current 
in  the  best  short  time  commercial  risk,  with  occasionally 
six  and  one-half  per  cent,  quoted.  The  borrowers  of 
large  amounts  of  money,  whether  it  be  for  public  utility 
purposes  or  otherwise,  if  they  are  able  to  get  it,  if  their 
credit  is  such  they  can  get  it,  would  have  to  pay  an 
enormous  premium  for  that  money  now,  and  I do  not 
think  that  I would  be  far  out  of  line  if  I should  say  10 
per  cent,  would  probably  be  the  cost  to  the  borrower  who 
wanted  to  go  into  the  market  now  and  get  several  million 
dollars  of  money,  no  matter  whether  it  was  for  public 
utilities  or  packing  business  or  what  not. 


244 


Even  under  ordinary  conditions  where  current  interest 
rates  are  5 per  cent,  on  commercial  requirements,  an  8 
per  cent,  cost  or  an  8|  per  cent,  cost  is  not  far  out  of 
line  for  these  large  flotations,  no  matter  what  they  may 
he,  and  of  course  the  less  promising  they  are  as  to  profit 
yielding  and  the  less  hopeful  they  are  as  to  ability  to 
succeed  and  prosper  and  be  able  to  pay  their  obligations, 
of  course  the  rate  increases  proportionately,  provided 
they  find  a lender  at  all. 

Answering  the  other  questions  as  to  whether  living  con- 
ditions and  general  business  conditions  in  the  City  of 
Chicago  would  be  affected  by  the  inability  of  public  utili- 
ties to  secure  capital  for  extensions  and  betterments,  I 
should  say  if  that  condition  were  permanent,  it  would 
prevent  the  city  from  functioning  to  its  fullest  ex- 
tent, because  what  makes  a city  is  the  fact  that  we  have 
transportation  facilities  whereby  men  can  assemble  in 
the  urban  districts  and  live  in  moderately  expensive 
homes  and  still  be  transported  to  their  business  promptly 
and  quickly  and  thereby  come  into  the  cities  and  thereby 
earn  very  much  greater  compensation  in  salaries  than 
would  he  the  case  if  they  had  to  stay  in  the  country ; and 
it  seems  to  me  if  anything  should  happen  whereby  the 
public  utilities  generally  would  be  broken  up  you  would 
break  the  city  up,  stop  everything,  because  it  is  so  inter- 
woven in  the  furnishing  of  light,  power  and  transporta- 
tion, and  everything.  I cannot  conceive  of  the  picking  up 
and  taking  out  of  the  utilities  over  night.  It  seems  to  me 
it  would  so  seriously  handicap  the  city  it  is  unthinkable 
almost. 

I do  not  know  what  your  plan  of  procedure  is,  whether 
you  want  me  to  go  ahead  and  express  my  opinions  in  a 
general  way  or  whether  you  want  to  catechise  me. 


245 


I want  to  say  that  personally  I am  not  here  as  a di- 
rector or  stockholder  of  any  public  utility  corporation. 
Personally  I do  not  have  a dollar  of  stock  or  a dollar  of 
bonds,  and  have  never  had.  The  institutions  with  which 
I am  connected  have  a very  slight  holding  of  some  of 
the  securities  of  the  surface  lines;  but  it  is  so  slight  I 
might  properly  say  that  even  they  have  no  direct  inter- 
est in  this  proposition  other  than  we  have  in  mind  the 
general  good  of  the  city,  consequently  I am  not  here  from 
any  personal  motives,  or  to  find  fault  with  what  has  been 
done,  or  criticise  anybody,  because  I recognize  that  the 
conditions  that  now  exist  are  the  outgrowth  of  condi- 
tions that  have  developed  during  a period  of  years,  and 
that  probably  people  who  have — I was  going  to  say  perse- 
cuted the  public  utilities,  have  done  so  in  good  faith.  At 
least  I am  willing  to  assume  they  have  meant  well,  but 
when  I take  into  consideration  the  handicaps  imposed 
upon  Chicago’s  business  and  commercial  interests  by  the 
lack  of  adequate  transportation  facilities,  it  seems  to 
me  that  in  relation  to  the  City  of  Chicago,  we  are  in 
exactly  the  same  position  with  reference  to  these  public 
utilities  that  the  nation  is  in  its  relationship  to  the  rail- 
roads today. 

Being  a director  of  the  Federal  Reserve  Bank  of  this 
city,  I was  invited  by  the  Federal  Reserve  Board  at 
Washington  to  attend  a meeting  called  by  that  body  a 
few  days  ago,  the  purpose  of  which  was  to  ascertain,  if 
they  could,  the  most  direct  cause  of  this  congestion  which 
has  existed  for  the  past  60^  or  90  days,  and  concerning 
which  you  men  know  so  much  there  is  no  need  of  repeat- 
ing it  here, — an  interchange  of  views  of  about  50  men 
coming  from  the  12  Federal  Reserve  Districts  of  the 


,246 


United  States  and  covering  the  total  geography  of  the 
country.  It  was  the  consensus  of  opinion  that  60  or  65 
per  cent,  or  a greater  per  cent,  of  our  trouble  now  is  due 
to  the  fact  that  people  who  produce  commodities  have 
been  unable  to  get  them  to  market.  In  our  own  case  we 
have  loaned  $50,000,000  to  our  bank  correspondents,  and 
I think,  without  a single  exception  to  the  rule,  in  their 
application  for  money  they  have  accompanied  it  with  a 
statement  that  if  they  could  only  get  cars  to  move  their 
grain  and  live  stock  they  would  not  have  to  borrow  this 
money.  Other  big  manufacturers  and  jobbers  tell  us,  in 
a similar  manner,  they  are  unable  to  get  their  money  out 
of  products  because  they  are  unable  to  deliver  them  where 
they  have  been  sold,  and  therefore  the  whole  scheme  of 
business  has  been  tied  up  in  this  congestion,  and  it  can 
only  be  relieved  by  a more  efficient  use  of  the  railroad 
facilities  of  this  country. 

Now,  I only  cite  that  because  it  seems  to  me  that  so 
far  as  our  city  welfare  is  concerned,  the  same  thing 
applies  except  in  a different  way,  because  that  is  all  finan- 
cial, whereas,  this  city  affair  would  be  both  financial  and 
physical.  If  a man  lived  15  or  18  miles  out  of  the  city 
and  the  facilities  have  been  provided  by  which  Ife  gets 
down  to  his  work  and  they  are  taken  away  from  him,  and 
that  applies  to  hundreds  of  thousands  of  people  in  the 
city,  it  interrupts  and  interferes  with  the  functioning  of 
the  city  as  a whole  and  seriously  impairs  the  situa- 
tion. 

Of  course,  I can  recognize  how  a man  who  has  seen  a 
street  car  run  down  the  street  in  front  of  his  house  from 
the  time  he  was  born,  and  how  every  time  he  has  gone 
downtown  during  his  entire  life,  he  has  run  out  of  the 
front  door  and  made  a run  for  the  car  and  grabbed  the 


247 


rail,  and  jumped  on, — comes  to  feel  after  a while  that 
that  is  a God  given  right,  and  that  it  should  not  be  in- 
terfered with  and  there'  should  not  be  any  change  in 
the  charges,  yet  it  seems  to  me  that  the  crux  of  this  whole 
question  and  all  other  questions  of  this  kind  must 
ultimately  involve  this  one  principle,  namely,  that  the 
public  will  have  to  learn  that  it  must  pay  for  the  kind 
of  service  that  it  exacts  from  any  public  utility  corpora- 
tion. 

Now,  that,  to  my  mind,  is  the  whole  principle  upon 
which  the  solution  of  all  these  differences  of  opinion  rests 
as  they  apply  both  to  public  utilities  in  cities  and  public 
utilities  in  the  whole  country. 

I think  every  man  who  is  in  business  appreciates  how 
much  retarding  of  business  has  been  caused  by  this  con- 
gestion of  products  at  the  source,  and  the  inability  of 
people  to  deliver  what  has  been  finished  to  where  it  will 
be  sold  and  consumed. 

As  a banker,  it  is  our  province  to  loan  money,  but  one 
of  the  fundamental  principles  involved  is  the  loaning  of 
that  money  to  people  and  corporations  whom  you  believe 
are  sufficiently  prosperous  to  justify  the  belief  that  they 
are  going  to  make  money  enough  not  only  to  maintain 
themselves  and  not  have  deterioration  in  the  property,  but 
also  to  pay  the  carrying  charges  and  what  they  borrow. 
It  seems  to  me  that  is  fundamental.  It  is  not  a question 
whether  it  is  a public  utility  or  a gas  company  or  what 
not.  When  a company  borrows  money  it  must  have  pros- 
pects to  pay  back  that  money  and  carrying  charges  and 
maintain  its  physical  condition,  so  there  is  a fair  meas- 
ure of  efficiency,  whether  it  is  a railroad  or  gas  com- 
pany, or  an  electric  light  company,  or  whether  it  is  a 


248 


manufacturing  concern,  or  a coal  company.  That  prin- 
ciple must  be  applied. 

Now  the  trend  of  events  in  the  last  few  years  has  been 
such  that  in  most  every  other  line,  these  questions  of  in- 
creasing cost  of  operation,  increased  wages  and  all  that 
sort  of  thing  can  be  easily  and  quickly  adjusted  in  a pri- 
vate enterprise,  but  unfortunately  in  public  affairs  af- 
fecting public  utilities  these  changes  are  brought  about 
so  slowly,  and  necessarily  slowly  because  they  must  come 
before  commissions  of  this  kind  and  be  given  proper  con- 
sideration, that,  naturally,  there  is  much  delay,  until  very 
often  a concern  that  starts  a year  on  a fairly  good  basis, 
may,  before  the  year  is  over,  if  there  are  sudden  changes 
in  its  operating  account  and  suddenly  large  increases  in 
its  cost  of  labor,  find  its  borrowing  ability  impaired  even 
in  a few  months. 

Now,  if  you  are  a stockholder  and  manager  of  a busi- 
ness and  you  allow  your  business  to  get  in  such  condi- 
tion that  you  impair  the  capital  employed,  you  know 
that  in  the  end  it  means  disintegration  and  failure,  and 
you  will  immediately  begin  to  set  about  to  correct  those 
conditions. 

Unfortunately  in  public  matters  we  have  to  go  about  it 
in  this  round-about  way,  and  I do  not  see  how  it  could 
be  otherwise,  but  that  puts  upon  the  commission  who 
sits  upon  these  questions  an  enormous  responsibility. 

I am  not  unmindful  of  the  fact  that  the  members  of 
this  Commission  are,  figuratively  speaking,  between  the 
“devil  and  the  deep  sea,’’  because  I know  no  matter 
what  their  opinions  may  be  there  is  going  to  be  a cer- 
tain percentage  of  people  who  will  criticise  them.  A man 
in  accepting  public  office  subjects  himself  to  attack, — be  it 
just  or  unjust, — and  that  is  one  of  the  unfortunate  penal- 


249 


ties  that  attaches  to  the  holding  of  public  office  in  this 
country,  but  if  he  is  so  constituted  that  he  cannot  stand 
criticism,  he  had  better  resign  from  that  office. 

Commissioner  Lucey:  You  do  not  know  of  any  com- 
missioners who  have  resigned,  do  you? 

A.  I have  not  heard  of  any  yet,  all  of  which  argues 
. they  are  pretty  good  fellows  and  willing  to  do  right  and 
willing  to  take  the  gaff  and  do  their  duty  as  they  see  it. 

Now,  I know  how  difficult  it  is  in  a body  of  this  kind 
to  get  these  things  correct.  I am  not  here  with  any  sta- 
tistics or  figures,  and  know  nothing  about  the  details  of 
these  roads.  I could  not  tell  you  how  much  they  owe  or 
how  much  stock  they  have,  but  I do  know  a great 
deal  of  the  general  situation,  and  I know  the  tendency 
has  been  in  the  direction  of  shearing  them  of  their  power 
to  exist  and  power  to  borrow  money  to  hold  their 
income  down  to  a minimum.  We  pay  three  times  as 
much  for  a pair  of  shoes  as  before  the  war  and  we  smile ; 
we  pay  twice  as  much  for  a suit  of  clothes,  and  we  do 
not  groan.  We  go  about  our  own  business  and  pay  one 
hundred  per  cent  more  for  our  general  living  conditions 
and  do  not  complain  very  much,  yet  if  we  have  to  pay 
four  cents  a thousand  more  for  our  gas  or  one  cent  more 
for  our  street  car  fare,  which,  after  all  constitutes  an 
infinitesimal  part  of  the  expense  of  our  living,  we  are  up 
in  arms.  We  think  that  because  we  have  paid  that  for 
years  and  years,  it  should  stay  that  way. 

We  have  had  a world  war  and  are  entering  into  a new 
era  of  things,  entering  into  a new  condition  of  things, 
and  unless  public  sentiment  changes  so  that  we  can 
change  from  some  of  the  old-time  conditions  and  tradi- 
tions, we  are  going  to  find  ourselves  very  seriously  handi- 


250 


capped  in  the  promotion  of  the  welfare  of  our  people  in 
the  future,  as  it  has  been  provided  for  in  the  past. 

I do  not  think  we  are  ever  going  back  to  the  old  times, 
normal  days,  so-called.  I cannot  analytically  prove  it, 
but  I think  any  man  who  is  a man  of  affairs  and  has  had 
to  do  with  these  things  in  a general  way,  appreciates 
that  we  have  entered  a new  era  of  things,  and  because  we 
paid  five  cents  for  a ride  on  the  street  cars  five  years  ago, 
that  is  no  reason  that  five  cents  is  the  proper  amount 
today;  because  we  paid  so  much  for  gas  five  years  ago,  it 
is  no  reason  why  that  is  the  proper  amount  today. 

If  we  can  get  back  and  find  out  what  the  cost  is  for  the 
service  that  the  public  demands  and  then  through  propa- 
ganda have  the  public  understand  that  under  the  law  of 
economics  and  simple  arithmetic  they  must  pay  at  least 
for  the  cost  of  the  service  they  exact,  a fair  return 
for  the  capital  used,  I think  we  will  get  along  pretty  well. 

Now,  I have  not  had  much  to  do  with  these  concerns 
except  on  the  side  of  having  them  apply  to  me  for  money, 
and  almost  invariably  when  applications  for  credit  came, 
particularly  during  the  last  two  or  three  years,  we  have 
had  to  close  our  eyes  and  turn  deaf  ears  to  things  which 
we  knew  seriously  needed  help.  I do  not  know  whether 
I violate  any  confidence  or  not,  I do  not  think  I do,  but 
I will  tell  you  a little  incident  which  will  illustrate  this 
better  than  any  explanation  of  mine,  by  saying  about  two 
years  ago  Mr.  Insull  of  the  Gas  Company  came  to  me 
and  he  said  the  Gas  Company  was  up  against  it ; we  owe 
one  million  dollars  of  personal  property  tax;  we  either 
are  going  to  be  compelled  to  borrow  enough  to  pay  that 
tax  and  help  the  city  out  and  thereby  help  the  general 
funds  of  the  county  and  the  city,  all  down  the  line,  or 
we  are  going  to  have  to  default.  K we  have  to  default 


251 


on  it,  I do  not  know  what  the  consequence  is  going  to  be, 
but  we  are  in  this  attitude,  if  we  cannot  get  one  million 
dollars,  it  looks  to  us  as  though  we  are  very  close  to 
bankruptcy. 

I went  over  the  affairs  of  the  company,  spent  four  or 
five  days  going  into  it  with  different  officers  of  the  com- 
pany, with  the  result  I called  together  five  or  six  of  the 
leading  bankers  of  Chicago  and  explained  the  situation 
and  told  them  the  gas  company  had  already  defaulted  on 
its  dividends  on  its  stock,  pointed  out  the  fact  there  were 
forty-eight  or  fifty  million  dollars  outstanding  held  by 
the  investors  of  Chicago,  and  those  investors  are  people 
in  the  middle  classes,  they  are  not  the  rich  people,  they 
are  people,  women  and  children  and  orphans,  whose  guar- 
dians and  whose  business  managers  have  put  this  money 
in  these  bonds  for  the  sake  of  income. 

Now,  if  we  cannot  get  this  help  and  this  company  has 
to  go  into  the  hands  of  a receiver,  we  have  to  default  on 
these  fifty  million  dollar  bonds.  As  I understand  it,  the 
interest  has  been  kept  up  up  to  this  time,  and  it  means  a 
great  deal  to  this  community.  We  had  at  that  time  the 
Surface  Lines  troubles,  the  Chicago,  Milwaukee  and  elec- 
tric troubles,  but  it  seemed  to  us  as  bankers  if  on  top 
of  it  all  the  Cas  Company  should  go  into  the  hands  of  a 
receiver,  it  would  muddy  the  water  very  much  so  far  as 
public  service  corporation  credit  was  concerned. 

AVell,  the  five  or  six  bankers  present  declined  collective- 
ly to  furnish  the  million  dollars,  although  it  was  to  be  se- 
cured by  chattel  mortgage  on  things  that  were  tangible, 
things  which  I would  not  call  the  highest  class  of  security, 
— ^but  they  were  secured  by  a mortgage  on  property  of 
different  kinds  and  things  that  were  tangible  to  the  ex- 
tent I felt  there  was  no  real  danger  in  making  the  loan. 


252 


Wliile  I was  willing  to  take  my  share  of  the  loan,  among 
the  five  or  six  banks,  as  assembled,  I eventually  had  to 
call  together,  I think  it  was  sixteen  banks,  in  order  to 
reduce  the  amount  so  that  each  of  these  banks  could  take 
a small  enough  amount,  that  if  anything  happened  it 
would  not  be  a serious  blow  to  them. 

Now,  those  are  facts  and  it  means  more  in  hearings  of 
this  kind  than  mere  statements  or  generalities  and  beliefs 
of  individuals  injected  into  the  situation.  I do  not  know 
what  the  trouble  is.  We  think  we  know.  We  think  there 
is  a close  relationship  between  politics  and  all  these  public 
utility  corporations.  I am  not  offering  this  in  the  na- 
ture of  a criticism,  however. 

I came  here  twenty-three  years  ago,  and  I know  the 
Gas  Company  was  subject  to  attacks  at  Springfield,  at- 
tacks of  legislation.  I can  remember  how  their  stock, 
upon  which  they  were  paying  seven  per  cent,  was  re- 
garded as  good  as  gold.  I can  remember  how  many 
bankers  would  have  recommended  it  to  a widow  or  orphan 
for  investment  funds  because  they  felt  it  was  secure,  yet 
I can  recall  how  that  fluctuated  in  value  from  $135  down 
to  85  or  86.  I had  at  that  time  a personal  friend  who 
speculated  almost  entirely  in  stock  of  the  Peoples  Gas 
Light  & Coke  Company,  and  when  some  attack  was  made 
on  it  at  Springfield  and  had  brought  the  stock  down 
fifteen  or  eighteen  or  twenty  points,  this  Hebrew  friend 
would  come  in  and  try  to  borrow  all  the  money  we  would 
let  him  have.  One  day  I said  to  him,  ‘‘What  do  you 
do  with  this  money!”  He  replied,  “They  attack  the 
Peoples  Gas  Light  & Coke  Company.  I buy  its  stock 
again  and  put  it  away  and  go  to  Europe,  and  maybe  next 
year  or  in  two  years  I shall  come  back  and  sell  it.” 
That  was  the  situation  twenty-three  years  ago,  and  I re- 


253 


member  that  these  public  utilities  were  then  used,  as 
was  commonly  said,  as  the  football  of  politics,  and  twen- 
ty-three years  ago,  the  same  measures  applied  in  a sim- 
ilar situation.  I speak  of  this  specifically  because  I want 
to  emphasize  the  fact  I am  not  here  to  speak  of  any  in- 
dividual or  any  individual  administration,  because  I think 
this  whole  thing  has  been  cumulating,  as  far  as  I can  see, 
over  a period  of  years,  and  probably  going  back  to  be- 
fore I came  to  Chicago.  That  they  have  been  able  to  hold 
them  together  at  all  under  these  conditions  and  maintain 
their  integrity  and  solvency  is  the  accomplishment  of  a 
greater  feat  than  I would  like  to  undertake  in  a business 
of  my  own,  and  I do  not  know  where  the  end  is  to  be,  un- 
less we  can  find  some  way  to  have  the  same  rules  applied 
to  these  public  utility  corporations  that  you  apply  to 
every  other  thing  that  requires  capital  invested,  and 
which  reflects  the  benefit  of  convenience  and  comfort  to 
the  public.  I do  not  know  what  will  be  the  effect  on  the 
•value  of  property  ten  or  twelve  or  fifteen  miles  south  or 
north  or  west  of  the  loop  if  over  night  these  things  could 
be  taken  up.  Someone  says  they  cannot  take  them  out, 
they  are  here.  Of  course  that  is  true,  but  it  certainly  is  a 
well  established  principle  of  economics  they  cannot  long 
be  run  at  a loss  to  them  and  the  people  whom  they  repre- 
sent, which  are  the  stockholders.  I do  not  imagine  the 
officers  and  directors  of  these  public  utility  corporations 
have  any  considerable  amount  of  the  stock  of  these  con- 
cerns. I do  not  mean  by  that  they  haven  T stock  which 
entails  an  obligation  on  them,  I do  not  mean  that  in  a 
critical  sense,  but  I do  mean  that  the  principal  owners  of 
these  public  utilities  are  the  people  themselves. 

Now,  generally,  they  have  to  come  to  the  court  of  last 
resort,  which  is  this  Commission,  as  I understand  it.  They 


254 


have  to  plead  their  cause  and  I know  there  are  two  sides 
to  it.  I know  there  will  be  opposition  from  the  other 
side,  they  will  take  the  position  they  ought  not  to  have 
any  increase,  but  it  is  up  to  you  gentlemen  in  the  last 
analysis.  You  have  got  to  do  your  duty  as  you  see  it, 
and  you  have  got  to  submit  to  criticism,  whatever  your 
decision  may  be. 

I have  nothing  further  to  say.  I did  not  come  here 
in  any  personal  sense  at  all.  I was  asked  to  come  and 
make  my  statement,  which  I have  done  gladly,  which  I 
think  I ought  to  do  as  any  citizen  having  the  public  wel- 
fare in  mind  and  at  heart. 

Chaieman  Wilkerson  : What  is  your  best  judgment  as 
to  the  probable  duration  of  the  present  condition  as  to 
interest  rate? 

A.  Well,  Mr.  Chairman,  I cannot  see  much  reaction 
soon  in  the  interest  rate.  When  you  take  into  considera- 
tion there  has  been  three  hundred  billion  of  property  de- 
stroyed as  results  of  the  war  you  can  be  sure,  as  an 
economic  principle,  it  is  bound  to  leave  its  impress  and 
effect  upon  every  human  being  in  the  world.  That  is  true. 

We  cannot  measure  the  expense  and  the  influence  it 
has  been  to  us,  but  it  is  there  nevertheless.  These  ex- 
treme rates  that  apply  here,  the  seven  per  cent  rate  I 
think  will  pass  just  as  quickly  as  the  products  in  the  coun- 
try can  be  brought  to  the  market,  and  the  credits  arising 
from  one  to  the  other  begin  to  offset  credits  so  we  can 
get  the  loans  of  the  banks  down  to  a normal  basis,  and 
maintain  a little  larger  excess  reserve,  then  the  rates 
here  likely  will  go  back  to  what  has  been  a normal  rate, 
in  my  judgment,  and  I would  say  five  and  one-half  to 
six  per  cent  for  current  rates,  but  I would  not  say  that 
would  mean  an  ability  on  the  part  of  corporations,  I mean 


255 


either  public  utility  or  any  other  kind,  to  borrow  money 
in  large  amounts,  and  by  that  I mean  twenty,  thirty,  fortv 
or  fifty  million  dollars,  at  less  than  probably  eight  or 
eight  and  one-half  per  cent.  They  paid  that  right  along 
even  years  ago.  I do  not  think  I mis-state  it,  when  current 
rates  were  four  and  a half  and  five,  it  cost  eight  per 
cent  very  largely  for  big  corporations  to  assemble  this 
money,  because  underwriters  who  fake  the  risk  of  promis- 
ing over  their  signature  to  give  a corporation  fifty  million 
dollars  assume  an  enormous  liability.  They  assume  when 
they  do  that  that  they  can  sell  the  liabilities  to  the  pub- 
lic, and  in  the  first  place  an  underwriting  syndicate  takes 
a very  small  profit,  maybe  one-half  per  cent  or  one  per 
cent,  then  another  syndicate  is  formed,  taking  in  as 
many  selling  agencies  as  they  can,  and  they  will  have 
two  to  two  and  a half  per  cent  for  distributing  these  se- 
curities. 

Now,  for  that  profit  these  men  assume  these  obliga- 
tions, and  as  I say  sometimes  humorously,  they  bet  they 
can  sell  the  securities,  and  very  frequently  they  lose,  and 
under  the  law  of  averages  every  little  while  when  one  of 
these  blocks  of  securities  does  not  go,  they  have  to  be  held 
sometimes  a year  or  two  or  three  years,  and  that  is  the 
reason  they  cannot  get  these  large  amounts  of  money  at 
current  rates. 

Of  course,  it  is  more  difficult  for  a public  utility  to  get 
money  than  for  a man  whose  assets  are  all  liquid.  Take 
a packer,  somebody  who  is  creating  things  that  must  be 
consumed  in  everyday  life,  naturally  that  is  much  more 
liquid,  and  those  people  can  borrow  money  a little  cheaper 
than  railroads,  and  particularly  is  that  true  in  the  last 
three  or  four  or  five  years,  since  the  credit  of  railroads 
and  public  utilities  have  been  affected  by  the  public  senti- 
ment toward  it. 


256 


This  whole  question  is  one  of  public  sentiment  and  the 
public  must  learn  it  must  pay  for  the  character  of  the 
service  it  demands  or  it  must  be  content  with  a very  much 
less  efficient  and  less  luxuriant  service.  One  of  the  two 
must  come.  It  is  up  to  the  public  to  say,  and  I believe 
if  the  public  understood  thoroughly  the  situation, 
there  would  be  a preponderance  of  opinion  in  favor  of 
trying  to  arrive  at  a conclusion  of  what  is  right.  I do 
not  want  to  see  public  utilities  have  more  than  they  ought 
to  have,  any  more  than  anybody  else,  because  that  in  turn 
would  he  an  improper  economic  principle,  and  one  which 
would  do  harm  and  do  damage,  hut  if  you  expect  concerns 
to  live  they  at  least  must  be  allowed  to  have  an  income 
that  will  pay  their  expense  and  carrying  charge',  even  if 
you  do  not  give  them  anything  for  profit  to  the  stock- 
holders, and  the  man  who  operates  a company  and  who 
borrows  money  and  doesn’t  keep  up  the  physical  condi- 
tion of  the  plant,  and  thereby  the  efficiency  of  it,  his  credit 
wanes  very  rapidly  at  any  bank.  These  problems  involve 
in  this  way  principles  that  are  general  in  their  character 
and  apply  alike  to  all  concerns  of  every  kind. 

Chairman  Wilkerson  : One  of  the  principal  problems 
with  which  we  have  to  deal  here  is  that  of  the  valuation 
of  the  property  for  rate  making  purposes.  We  must  de- 
termine under  the  law  the  fair  value  of  the  property  and 
in  determining  that  we  are  obliged  to  give  consideration 
to  what  it  would  cost  to  reproduce  the  property  today. 
What  is  your  opinion  as  to  the  probable  duration  of  the 
present  scale  of  high  values,  how  long  in  the  future  will 
that  last? 

A.  That  is  merely  a guess. 

Chairman  Wilkerson  : It  is  a guess  on  the  part  of 
anybody. 


257 


A.  My  opinion  is  of  no  more  value  than  anybody 
else’s,  but  I think  it  is  here  for  some  little  time,  because 
it  can  be  cured,  according  to  my  judgment,  in  only  one  of 
two  ways, — either  by  having  the  country  blow  up,  fac- 
tories close  and  men  thrown  out  of  employment,  which  is 
so  drastic  no  intelligent  human  being  wants  to  see  that, 
and  that  is  what  we  have  been  fighting  against  all  the 
time, — and  the  other  way  is  to  increase  production. 

Now,  I sometimes  express  it  this  way,  Mr.  Chairman, 
that  the  proper  method  of  correcting  these  high  values, 
is  to  speed  up  production,  so  that  you  have  got  competi- 
tion in  the  commodities  themselves.  Now,  I mean  by  this 
simply  this : You  go  to  a store  today  and  buy  a pair  of 
shoes  and  they  tell  you  yes  they  have  the  kind  of  shoes 
you  wear,  and  you  look  about  and  unfortunately  they 
have  not  your  size,  all  of  which  means  they  are  selling 
shoes  as  fast  or  faster  than  they  can  get  them;  but  if, 
on  the  other  hand  the  production  of  shoes  is  speeded  up 
so  that  every  shoe  merchant  in  Chicago  can  buy  all  the 
shoes  he  wants,  and  it  develops  collectively  they  have 
bought  each  in  their  individual  capacity  more  than  they 
can  sell,  it  does  not  take  them  many  days  to  find  out  they 
are  overstocked,  and  the  commodities  themselves  in  one 
store,  as  against  the  commodities  in  another  will  create 
a condition  that  will  induce  price  cutting  quickly,  because 
the  man  who  finds  he  is  overstocked  is  going  to  do  what 
he  finds  is  necessary  in  the  way  of  price  to  get  rid  of  it. 
Let  me  follow  that  principle  a little  further,  and  I am 
glad  to  do  it,  because  I think  there  is  some  misappre- 
hension as  to  what  the  bankers  feel. 

Here  and  there  you  have  seen  notices  of  price  cutting 
of  fifteen,  twenty,  twenty-five  and  even  thirty  per  cent. 
There  are  some'  people  who  generally  believe  that  is  the 
beginning  of  the  lowering  of  prices. 


258 


Now,  gentlemen,  the  scientific  method  of  lowering  of 
prices,  and  the  only  real  lowering  of  prices  that  will  be 
effective  and  permanent,  must  begin  at  the  factory  where 
the  value  of  the  raw  material  and  labor  enters  into  it. 
This  man  in  the  store  here,  or  Kansas  City  or  Omaha, 
because  he  is  overbought  and  overborrowed  and  knows  he 
must  meet  his  obligation  in  the  bank,  feels  he  must  sacri- 
fice a little  of  the  profit  he  hoped  to  get  and  puts  a good 
sale  price  on  it.  It  helps  a little  bit  and  gives  heart  to  the 
man  who  buys  it,  but  knowing  that  the  world  is  dependent 
on  us  I do  not  see  any  hope  of  material  reduction  for 
some  little  time.  It  may  be  a year  or  two  or  more,  I can- 
not tell,  but  I do  not  look  for  any  rapid  reaction  because 
labor  and  efficiency  of  labor  enters  into  it.  I am  not 
criticising  labor,  but  after  all  there  is  this  to  be  borne  in 
mind,  when  you  discuss  these  questions,  all  during  the 
war  we  accomplished  wonders  because  everybody  took  his 
coat  off  and  and  went  to  work  and  worked  as  one  man. 
We  learned  that  efficiency  and  co-operation  were  the 
watchwords  of  the  day  and  how  great  could  be  our  ac- 
complishments when  there  was  co-operation  between  cap- 
ital and  labor,  and  we  resolved  that  efficiency  and  co- 
operation should  henceforth  be  our  watchword,  but  gen- 
tlemen, it  is  a sad  commentary,  that  from  the  day  the 
armistice  was  signed,  that  co-operative  spirit  has  dis- 
integrated practically  every  day  to  the  present  time.  I 
do  not  know  all  of  the  direct  causes  for  this  disintegra- 
tion, but  that  is  the  situation,  Mr.  Chairman.  That  an- 
swers in  part  your  question,  and  if  this  growing  ineffi- 
ciency continues  it  will  be  very  much  longer  before  prices 
go  down  than  it  will  if  we  can  get  efficiency  and  co-opera- 
tion. When  we  will  get  that  you  know  as  well  as  I do. 

Chairman  Wilkerson  : Looking  ahead  as  we  have  to 


259 


in  these  valuation  cases  for  a period  of  say  five  to  ten 
years,  is  there  in  your  opinion  any  probability  that  there 
will  be  a return  to  the  pre-war  scale  of  values  in  that 
period? 

A.  Not  within  the  next  five  years.  I doubt  if  we  will 
ever  get  back  to  the  pre-war  scale.  That  is  only  an  opinion, 
but  when  you  see  what  has  been  accomplished,  you  see 
how  much  greater  comfort  and  how  many  more  luxuries 
people  enjoy  than  they  used  to  have,  I think  you  can  rea- 
sonably calculate  you  will  never  be  able  to  go  back. 
I do  not  think  the  thinking  man  and  the  man  of  affairs, 
the  man  who  controls  capital  wants  to  go  back,  and  I 
think  the  world  is  filled  with  people  who  feel  as  I do. 
I want  to  do  what  is  fair,  and  I want  my  institution  to 
do  what  is  fair.  I only  want  what  is  fair  and 
I want  to  be  fair  to  the  other  fellow,  and  I do  not 
think  there  was  ever  a time  in  the  history  of  the  world 
when  men  who  control  capital  were  as  anxious,  if 
they  can  do  it  in  fairness  and  reason,  to  be  fair  as  they 
are  today.  That  sentiment  prevailing,  and  the  higher 
order  of  living  that  has  prevailed  with  certain  classes  in 
the  last  five  years,  will  prevent  us  from  ever  getting  back 
to  the  low  basis  of  pre-war  times. 

Three  or  four  years  ago,  I regarded,  in  making  my 
estimates,  in  forming  my  book  of  statistics,  I regarded 
five  per  cent  interest  during  a period  of  five  years,  as 
being  the  commercial  rate,  I do  not  mean  investment 
business  such  as  stocks  and  bonds,  but  in  our  loans  to  our 
commercial  houses;  we  figured  one  year  we  might  get 
more  than  five;  another  year  under  five,  but  for  over  a 
five  year  period  up  to  1915,  we  concluded  about  five  per 
cent  average  was  the  current  rate  of  interest. 

Now,  in  1915,  the  war  having  begun  in  1914,  Europe 


260 


having  ordered  such  an  enormously  large  amount  of 
goods  from  this  country,  and  our  trade  balance  having 
run  up  to  ten  billion  dollars  that  year,  with  a consequent 
vast  accumulation  of  funds,  interest  rates  in  this  coun- 
try ran  down  and  it  may  he  a surprise  to  some  of  you 
gentlemen  to  know  that  the  institution  over  which  I pre- 
sided averaged  only  three  and  ninety-five  hundredths  per 
cent  on  all  its  investments  in  the  year  1915. 

1916  it  picked  up ; it  was  a little  better.  The  reason  foi 
that  was  we  had  such  an  infiux  of  gold  and  business  from 
Europe,  that  under  the  law  of  supply  and  demand  the 
more  plentifully  you  got  money  the  cheaper  it  was,  and 
the  cheaper  money  is  the  higher  things  go  by  inverse 
ratio. 

We  have  about  two  billion  and  a half  expansion  in  our 
circulating  medium  since  we  went  into  the  war.  We  have 
had  approximately  one  billion  and  a half  increase  in 
gold  supply. 

We  have  today,  in  this  country  at  least  thirty-three 
and  one-third  per  cent  of  the  gold  supply  of  the  world. 
We  have  forty-two  per  cent  gold  reserve  against  our 
credit,  and  yet  for  the  last  sixty  days,  as  bankers,  we  have 
been  put  in  the  attitude  of  declining  loans  to  business 
houses  because  we  have  had  to  retrench.  The  very  thing 
that  created  a rate  of  3.95%  in  1915,  being  an  over  supply 
of  money  in  circulation,  no  question  about  it  in  my  mind, 
has  been  our  salvation  since  because  in  the  expansion 
it  has  been  necessary  for  us  to  accomplish  what  we  have 
in  the  war,  and  the  expansion  that  has  gone  on  since  the 
armistice  was  signed,  has  used  all  of  that  gold  as  reserve, 
until  we  now  are  down  to  only  two  or  three  per  cent  above 
our  requirement  under  the  Federal  reserve  system.  For- 
tunately, however,  we  are  doing  business  on  a gold  basis. 


261 


and  the  rest  of  the  world,  aside  from  England,  are  on 
a paper  basis,  or  at  least  in  part. 

Now,  with  the  whole  of  Europe  crying  for  help,  there 
is  not  a man  that  goes  to  Europe  and  meets  any  man  of 
prominence  that  does  not  come  back  and  get  busy  to  see 
if  he  cannot  dig  up  a loan  somewhere,  somehow,  but  we 
have  not  the  money  at  the  present  time,  or  the  sentiment 
apparently  at  this  time,  to  help  those  people  with  loans. 
Personally  I think  the  policy  this  country  has  followed 
in  declining  to  help  them  and  helping  them  resuscitate 
their  industries,  is  a detriment  in  the  long  run.  We  are 
feeling  that  right  now.  It  is  reflected  in  the  fact  the 
pound  sterling  was  $3.87  yesterday  as  against  $4.86  ordi- 
narily, and  it  is  reflected  in  the  further  fact  our  exports 
last  month  dropped  off  175  million  dollars,  and  as  time 
goes  by  that  is  hound  to  get  worse  unless  we  can  correct 
that  industrial  situation.  Those  are  all  things  that  enter 
into  the  question  how  long  these  prices  are  going  to  be 
kept  up.  If  you  made  a commodity  that  was  sent  to 
Europe  you  would  not  send  more  than  one  shipment  be- 
cause you  could  not  get  the  dollars  back  without  loss. 
You  could  not  compete  with  the  rest  of  the  world  because 
you  would  have  to  stand  the  discount  on  the  pound  ster- 
ling, and  that  absorbs  your  profit  and  more,  too.  There 
is  not  a man  in  the  world  who  can  tell  when  that  is  going 
to  be  corrected.  If  we  knew  on  the  first  of  July  or  August 
the  pound  sterling  would  go  back  and  the  manufacturer 
could  run  his  factory  and  load  the  boats  and  send  them 
back  there  and  finance  himself,  the  situation  would  revive 
here  very  rapidly  and  the  process  of  increasing  the  sup- 
ply of  things  would  take  place  very  rapidly. 

Now,  with  the  world  bereft  of  foodstuffs,  in  Germany 
a pound  of  butter  today  costs  twenty-two  and  twenty- 


262 


four  marks,  and  to  the  Germans  the  mark  is  still  a mark, 
it  has  not  gone  down  there.  Under  the  normal  value  the 
pound  of  butter  would  cost  between  five  and  six  dollars 
a pound.  If  you  bought  a mark  over  here  at  one  or  two 
cents  you  would  say  it  did  not  cost  so  much,  but  those 
German  people  do  not  have  money  over  here ; and  in  the 
French  currency,  a franc  which  is  worth  normally  twenty 
cents  has  sold  recently  as  low  as  16.55  francs  for  a dollar. 

Those  are  all  conditions  that  enter  into  this  question 
of  rates,  Mr.  Chairman,  and  I believe  that  the  minute 
that  we  square  away  here,  and  the  minute  we  get  our 
peace  treaty  out  of  the  way,  I think  you  will  find  the 
average  business  man  in  America  will  appreciate  it  is  to 
the  interest  of  America  in  dollars  and  cents  to  do  all  we 
can  to  help  finance  those  people  over  there,  and  if  we  un- 
dertake to  do  that,  I cannot  see  any  cheap  money  in  this 
country.  Over  three  hundred  billion  has  been  destroyed 
and  taken  out  of  existence,  and  it  is  going  to  take  a long, 
long  time  to  replace  it. 

Chaikman  Wilkekson  : Do  you  care  to  ask  him  now? 

Mr.  Cleveland:  Yes. 

Cross-Examination  hy  Mr.  Cleveland 

Q.  Mr.  Reynolds,  what  institutions  are  you  connected 
with  besides  the  Continental  & Commercial  National 
Bank! 

A.  The  Continental  & Commercial  Trust  & Savings 
Bank. 

Q.  That  is  the  Hibernian? 

A.  The  Hibernian  business  was  turned  over  and  con- 
solidated with  the  trust  and  savings  bank  fifteen  months 
ago. 


263 


Q.  The  trust  and  savings  bank  carried  savings  ac- 
counts ? 

A.  They  do,  yes  sir. 

Q.  What  is  the  rate  of  interest  on  savings  accounts? 

A.  Three  per  cent. 

Q.  Has  there  been  any  change  in  that  since  before 
the  war? 

A.  There  has  not,  no  sir. 

Q.  In  the  spring  of  this  year,  did  your  bank  make  a 
bid  for  deposits  of  city  money? 

A.  It  did,  yes  sir. 

Q.  What  rate  of  interest  did  you  bid? 

A.  I cannot  tell  you  offhand,  because  I have  not  the 
record. 

Q.  Less  than  three  per  cent,  wasnT  it? 

A.  I think  three  per  cent  on  the  time  and  probably 
two  and  one-half  per  cent  on  the  active  account. 

Q.  Do  you  know  how  much  savings  accounts  there 
are  in  the  city  banks  today? 

A.  No  sir,  I don’t.  I could  not  tell  you  offliand. 

Q.  A very  large  amount? 

A.  A very  large  amount,  yes  sir. 

Q.  Four  hundred  million  or  more,  isn’t  it? 

A.  Yes,  I should  judge  it  is  fully  that,  about  that. 

Q.  The  rate  you  are  paying  is  what  the  other  banks 
are  paying? 

A.  They  are  all  paying  the  same  as  far  as  I know. 

Q.  The  same  thing  is  true  of  the  city  money? 

A.  Yes  sir. 


264 


Q.  How  much  of  that  city  money  have  you  on  deposit 
now? 

A.  Well,  the  city  money  will  run  from  two  hundred 
thousand  to  sometimes,  for  instance,  when  the  city  treas- 
urer, if  we  have  an  active  account,  he  may  have  three  or 
four  or  five  million  dollars  today  and  two  hundred  thou- 
sand dollars  tomorrow.  They  do  not  carry  a large  bal- 
ance because  they  have  use  for  the  money  and  pay  it  out. 

Q.  They  have  various  accounts  that  are  rather  perma- 
nent in  the  banks,  haven’t  they? 

A.  No,  not  now.  They  used  to  have  large  traction 
funds  and  such  that  used  to  be  kept  in  the  bank  and  they 
are  invested  in  bonds  and  city  warrants  largely. 

Q.  Do  you  know  whether  or  not  it  is  true  that  the  city 
now  has  an  average  of  deposits  of  about  twelve  million 
dollars  ? 

A.  I think  they  have,  yes,  with  all  the  banks. 

Q.  That  is  drawing  three  per  cent  or  a little  less  ? 

A.  Yes,  and  you  probably  would  better  couple  with 
that  the  fact  that  they  owe  the  banks  approximately  fif- 
teen million  dollars  at  five  per  cent. 

Q.  Yes ; that  is  money  that  the  city  has  borrowed  on 
tax  anticipation  warrants? 

A.  On  tax  anticipation  warrants,  yes  sir. 

Q.  At  what  rate? 

A.  Five  per  cent. 

Q.  It  is  a fact,  is  it  not,  that  the  county  treasurer 
now  has  on  deposit  with  the  banks  approximately  fifty 
million  dollars  of  accounts  collected  this  year  for  the 
taxes  that  have  become  due  this  year? 


265 


A.  Well,  he  has  moneys.  I do  not  know  how  much 
because  he  has  it  in  all  the  hanks  in  town. 

Q.  A large  amount? 

A.  Yes  sir. 

Q.  You  have  some  of  it? 

A.  Yes. 

Q.  How  much  are  you  paying  him? 

Mr.  Dunbaugh  : I am  wondering  if  this  is  vital  to  this 
particular  matter? 

Mr.  Cleveland:  It  bears  on  the  rate  of  interest,  I 
think. 

Chairman  Wilkerson  : If  the  witness  has  no  objec- 
tion, we  have  none. 

A.  We  are  paying  two  and  one-half  per  cent  on  the 
active  account. 

Mr.  Cleveland  : Do  you  happen  to  know  how  much 
you  have? 

A.  I do  not,  no. 

Q.  Do  you  think  that  for  the  city  and  Board  of  Edu- 
cation fifty  million  dollars  would  he  an  overestimate? 

A.  Do  you  mean  on  hand  now? 

Q.  Yes. 

A.  I could  not  answer  that ; I do  not  know. 

Chairman  Wilkerson:  I suppose  there  are  accurate 
records  somewhere? 

Mr.  Cleveland:  I can  state  that  there  is  upwards  of 
fifty  million  dollars. 

A.  I think  he  is  accurate  in  his  amount. 

Mr.  Cleveland:  I got  those  figures  from  the  comp- 


266 


troller  and  I will  ask  that  to  be  taken  as  a statement 
unless  someone  objects,  and  we  can  bring  him  over. 

Chairman  Wilkerson  : We  will  take  your  statement. 

Mr.  Clrvetand:  That  is  the  Board  of  Education  and 
the  city. 

A.  Let  me  amplify  a little  since  that  has  been  injected 
into  it  by  saying  there  are  practically  fifty  million  dol- 
lars due  the  banks  of  the  City  of  Chicago  that  they  have 
borrowed  from  them  on  a five  per  cent  basis  out  of  last 
yearns  taxes  and  unpaid.  The  banks  of  the  City  of  Chi- 
cago are  to  meet  this  afternoon  with  a view  to  seeing 
what  they  can  do  to  finance  the  city. 

They  want  in  the  neighborhood  of  fifteen  to  twenty 
million  dollars,  and  so  far  as  I can  figure  they  are  behind 
something  like  thirty  million  dollars  on  this  yearns  work. 
In  other  words,  the  amount  borrowed  from  the  traction 
fund  is  twenty-one  million  odd;  plus  the  amount  they  owe 
banks  would  be  about  thirty-three  million  dollars,  and 
their  balance  against  it  is  around  eleven  million  dollars, 
as  I understand  it. 

Q.  Mr.  Reynolds,  you  know  it.  is  a fact  that  if  the 
County  Treasurer  would  pay  over  to  the  city  at  this  time 
moneys  that  he  has  already  collected  for  taxes,  that  the 
city  would  be  able  immediately  to  take  up  these  loans? 

A.  I do  not  know  that. 

Q.  On  these  old  tax  anticipation  warrants? 

A.  I do  not  know  that  because  I do  not  know  what  is 
due  the  city.  I have  not  any  knowledge  of  that  definitely. 

Mr.  Cleveland  : I will  state  that  is  a fact  too. 

Q.  Now,  you  spoke  about  the  case  of  the  Gas  Com- 
pany. Now,  you  finally  loaned  them  money  through  the 


267 


bankers  to  protect  the  credit  of  the  various  institutions 
in  the  city.  You  would  not  say  that  was  a good  loan? 

A.  I did  not  say  to  protect  the  credit  of  the  various 
institutions  of  the  city,  but  to  protect  the  credit  of  the 
bonds  of  the  gas  company  which  were  approximately 
forty-six  or  forty-eight  million,  that  is  what  I mean  to 
say. 

Q.  That  loan  was  secured  by  a chattel  mortgage? 

A.  Yes. 

Q.  Was  that  chattel  mortgage  a first  lien  on  the  prop- 
erty? 

A.  It  was  on  a good  deal  of  personal  property.  It  was 
not  what  you  would  call  a first  class  loan,  because  if  it 
had  been  they  would  not  have  had  to  go  to  sixteen  differ- 
ent banks  to  get  it. 

Q.  Now,  you  mentioned  some  of  the  elements  that  are 
to  be  considered  in  the  making  of  a loan.  Is  it  one  of 
the  elements  that  is  vital,  the  security  that  the  borrower 
has  to  otfer? 

A.  Certainly  it  is. 

Q.  Assuming  a utility  company,  a public  utility  whose 
assets  are  mortgaged  for  substantially  all  or  more  than 
their  worth,  would  that  kind  of  a utility  be  able  to  get 
money  at  any  rate  of  interest? 

A.  I do  not  think  it  would,  no. 

Q.  The  remedy  for  that  kind  of  a case,  is  to  get  more 
capital  in,  isnT  it? 

A.  If  they  are  mortgaged  for  more  than  they  are 
worth,  yes,  certainly. 

Q.  Without  getting  more  capital  in  the  only  way  they 
could  borrow  money  to  use  for  capital  purposes  would 


268 


be  by  somehow  or  other  putting  a lien  on  the  property 
that  is  ahead  of  the  existing  lien,  wouldn^t  it? 

A.  You  could  not  very  well  do  that.  A man  who  has 
bought  a first  mortgage  bond,  secured  by  first  mortgage 
on  a public  utility  would  not  let  them  come  in  and  make 
a first  loan  ahead  of  his.  He  might  have  had  a good 
credit  at  the  time  he  made  it. 

Q.  I am  speaking  from  the  banker’s  point  of  view, 
if  these  people  who  have  the  mortgages  came  to  you  in  a 
case  such  as  I state  and  would  consent  to  putting  a prior 
lien  on  the  property,  then  the  bankers  would  make  the 
loan  ? 

A.  I would  answer  that  yes,  but  let  me  amplify  it  a 
little  by  saying:  You  must  not  get  confused  in  the  ques- 
tion of  rates  on  these  things  by  what  the  banker  said. 
You  must  take  into  consideration  also  the  fact  that  the 
banker  does  not  take  those  to  keep.  He  is  the  agent.  He 
forms  a syndicate  that  sells  them  to  the  public,  and  in 
the  analysis  the  public  passes  judgment  upon  whether 
the  security  is  such  that  it  can  sell.  The  average  banker 
knows  in  a general  way  what  the  character  of  that  se- 
curity must  be  in  a general  way,  when  he  goes  into  it, 
but  sometimes  he  guesses  wrong  even  then,  and  you  must 
remember  this : Those  funds  deposited  in  banks  are  sub- 
ject to  check  of  other  people  and  a well  managed  bank 
does  not  buy  a large  amount  of  securities  to  carry  long. 
They  may  go  in  a syndicate  and  invest  six  or  eight  or 
ten  million  dollars  until  they  can  be  distributed  and 
placed  in  investors’  hands,  and  a bank  that  has  public 
money,  saving  and  every  kind,  if  we  invest  all  that  money 
in  long  time  securities,  we  would  be  regarded  as  a very 
poor  banker  so  that  if  we  go  into  a deal  to  buy  say  ten 
million  dollars  of  long  term  bonds,  it  is  not  our  purpose 
to  carry  those  bonds. 


269 


Q.  You  sell  them  out? 

A.  We  sell  them  out.  We  have  got  to  conform  in  the 
security  we  get  very  largely  to  what  the  public  demands, 
because  here  again  public  opinion  becomes  the  potent 
factor,  and  it  makes  no  difference  whether  it  is  right  or 
wrong,  it  has  the  same  effect. 

Q.  You  said  you  want  to  be  fair  and  I want  to  be  fair. 

A.  Yes. 

Q.  Speaking  as  an  individual,  if  somebody  came  to 
you  and  asked  your  advice  about  buying  a security, 
and  it  appeared  that  security  was  not  backed  by  sufficient 
assets,  you  would  not  advise  anybody  to  buy  it,  would 
you? 

A.  We  would  not  take  it  and  not  ask  our  friends  to 
lake  it.  We  would  advise  them  against  it 

Q.  It  is  an  impossible  situation,  isn’t  it? 

A.  That  is  right. 

Q.  Suppose  a public  utility  company  gets  in  a position 
where  bankers  won’t  let  it  have  any  more  money  and  it 
cannot  borrow  any  more  money,  and  needs  more  capital 
to  go  in,  what  is  the  remedy? 

A.  Receivership,  I guess.  I do  not  know  of  anything 
else. 

Q.  Is  it  your  idea  that  the  Commission  here  should 
increase  rates  to  provide  capital? 

A.  No,  I do  not  say  that,  I do  not  say  that.  I say  it  is 
the  duty  of  the  Commission  here  to  find  out  what  the 
situation  is  and  be  fair  with  reference  to  rates  and  in- 
come. I do  not  know  what  that  is  and  do  not  pretend  to 
know  and  cannot  know. 

Q.  Is  it  not  your  idea  that  the  rates  should  be  raised 
so  as  to  provide  capital? 


270 


A.  No,  I would  not  say  that,  hut  if,  however,  their 
capital  had  been  impaired  by  operating  at  a loss  while 
under  the  influence  of  the  Commission’s  rates,  then  I 
should  not  think  you  would  be  out  of  line  by  putting 
back  in  the  treasury  in  rates  what  they  have  lost  by 
reason  of  that.  I do  not  know  that  is  a fact. 

Q.  You  spoke  somewhat  of  the  method  of  banking. 
The  people  deposit  the  money  in  the  bank,  and  your  busi- 
ness is  to  reloan  that  money  and  make  money  on  it  I 

A.  That  is  the  purpose,  yes.  Primarily  the  bank  is 
organized  for  the  same  object  any  other  business  is, — for 
profit.  A bank  receives  the  idle  funds  of  the  public.  They 
are  deposited  in  the  bank  and  under  the  law  of  averages 
the  banks  can  loan  those  funds  back,  and  my  idea  of  a 
banker’s  obligation  is  to  do  all  he  can  consistently  and 
safely,  and  along  proper  economic  principles  in  the  loan- 
ing of  those  funds,  to  help  upbuild  the  community;  in 
other  words,  help  loan  that  to  industries  and  commerce 
in  a way  to  do  the  most  it  can  safely. 

Q.  What  is  the  rule  in  the  banks  in  Chicago  about  pay- 
ing interest  on  ordinary  deposits! 

A.  Everybody  has  their  own  rule.  There  is  no  hard 
and  fast  rule  on  that. 

Q.  What  is  the  maximum  rate,  would  you  say! 

A.  Well,  three  per  cent,  as  far  as  I know. 

Q.  That  would  have  to  be  a very  large  and  rather 
permanent  balance  to  get  that  much,  wouldn’t  it! 

A.  Yes,  I should  say  it  would. 

Q.  Ordinarily  you  would  not  get  anything,  any  inter- 
est on  anything  up  to  a thousand  dollars! 

A.  You  would  not  at  our  place,  and  we  do  not  pay 


271 


interest  on  accounts  generally  except  say  railroad  ac- 
counts, public  accounts,  public  moneys  and  things  of  that 
kind.  Of  course,  out  of  the  earnings  we  make,  first  of 
all  we  have  to  stand  losses,  if  we  have  any;  secondly,  we 
have  to  maintain  our  own  equipment  and  our  own  ex- 
penses, and  the  successful  banker  is  the  man  who  in 
handling  those  funds,  does  all  he  can  to  have  them  placed, 
for  instance,  where  they  will  help  factories  employ  labor, 
if  it  can  be  done  consistently. 

Q.  Now,  Mr.  Eeynolds,  in  your  opinion,  would  the 
ability  of  a utility  to  get  money  or  to  get  capital  or  credit 
be  affected  by  its  ability  to  make  a binding  contract  with 
the  municipality  by  which  it  would  secure  its  rights  for 
a term  of  years? 

A.  I do  not  think  that  would  go  a long  ways  because 
there  are  so  many  contentions  arising  over  those  things, 
there  is  a difference  of  opinion  on  that.  That  is  the  sit- 
uation right  here,  as  I understand  it. 

Q.  Yes.  Supposing  that  the  utility  has  its  main  rights 
in  the  street  and  the  franchise  is  about  to  expire  and 
there  was  doubt  as  to  whether  or  not  it  could  get  the 
franchise  renewed,  would  that  affect  the  ability  to  get 
credit  or  capital? 

A.  Anything  that  would  militate  against  its  pros- 
pects for  future  success  would  necessarily  militate 
against  it. 

Q.  Now,  as  a matter  of  making  loans  to  a utility  or 
to  any  other  concern,  each  particular  case  would  have  to 
be  taken  up  and  considered  on  its  own  bottom! 

A.  Certainly.  There  is  no  rule  that  could  be  hard  and 
fast  that  could  apply  to  any  class  of  business.  Every 
business  of  every  class  is  a law  unto  itself. 


Q.  Do  you  know  whether  or  not  the  Chicago  Surface 
Lines  can  borrow  money  at  the  present  time? 

Mr.  Sheean:  That  is  objected  to  as  immaterial  on  this 
general  inquiry. 

Chairman  Wilkerson:  Sustained. 

Mr.  Cleveland : Exception. 

A.  I ask  you  the  same  question  in  regard  to  the  ele- 
vated railroad. 

Mr.  Dunbaugh:  That  is  objected  to. 

Chairman  Wilkerson:  Sustained. 

Mr.  Cleveland:  Exception.  / 

Q.  Now,  you  spoke  about  the  different  kinds  of  ser- 
vice. Is  it  or  not  true  that  in  your  view  the  amount 
that  is  charged  for  service  should  depend  somewhat  on 
the  kind  of  service  that  is  rendered? 

A.  Yes,  upon  the  class  of  the  service,  surely. 

Q.  Well,  would  it  depend  upon  the  question  of  service 
that  is  rendered? 

A.  Well,  I would  not  say  so  unless  it  had  to  do  with 
cost,  because  this  question  of  cost  is  a question  of  income 
and  outgo,  it  seems  to  me. 

Q.  Supposing  the  company  is  obligated  to  furnish  ade- 
quate service  and  it  furnishes  only  grossly  inadequate 
service,  would  you  think  that  the  people  that  use  ^ that 
service  ought  to  pay  as  much  for  inadequate  service  as 
adequate  service? 

A.  That  is  part  of  such  a complex  situation  I would 
not  want  to  try  to  answer  that  because  I am  not  sure  I 
could  do  it  fairly  to  either  side. 

Q.  You  spoke  about  the  inflation  of  the  currency,  of 


expansion  of  the  currency.  Is  it  right  to  say  inflation  of 
the  currency,  at  the  present  time? 

A.  Yes,  but  what  I meant  more  particularly  was  the 
over  extension  of  credit,  although  I did  say  the  currency 
itself  had  expanded  two  and  one-half  billion,  but  the  big 
over  expansion  and  credit  is  the  thing  that  has  occupied 
our  attention  in  the  last  two  or  three  months. 

Q.  Is  there  a prospect  of  there  being  a deflation  in  the 
currency  ? 

A.  It  depends  on  how  the  things  go.  I would  answer 
that  yes,  there  is  a prospect  but  it  won’t  be  done  rapidly. 

Q.  What  do  you  mean  by  that,  in  time ! 

A.  Let  me  amplify  it  a little.  You  want  the  answer 
right 

Q.  Yes. 

A. as  I want  to  give  it.  The  moment  it  seemed 

necessaiy  for  banks  to  begin  the  policy  of  retrenchment 
and  refuse  to  grant  credit  where  it  was  not  absolutely 
necessary  to  take  care  of  industry,  we  were  confronted 
with  public  opinion  of  this  kind.  If  you  ask  a man 
to  defer  taking  that  million  dollars  they  rather  laugh 
at  you,  and  say  it  is  not  any  trouble  to  take  that  million 
dollars  over  to  the  Federal  Reserve  Bank,  and  you  can 
turn  it  into  a credit  and  serve  your  purpose. 

Now,  the  crux  of  the  trouble,  as  I see  it,  during  the 
last  two  or  three  months,  I won’t  say  trouble,  substitute 
the  word  ‘‘situation”  there,  has  been  that  the  public  had 
come  to  feel,  up  to  perhaps  30  days  ago,  that  the  supply 
of  credit,  at  least  which  the  Federal  Reserve  Bank  could 
issue  was  without  limit.  They  honestly  believed  any 
man  whose  note  was  good,  any  corporation  who  showed 
two  to  one  over  liabilities  of  quick  assets,  that  his  paper 


274 


was  eligible  at  the  Federal  Eeserve  Bank  and  he  conld 
go  over  there  and  get  the  money.  Everybody  in  dis- 
cussing the  Federal  Eeserve  system  from  the  time  of  its 
inception  had  pointed  out  how  much  credit  it  could  ex- 
tend until  the  public  got  the  viewpoint  there  was  no 
bottom  to  its  stopping,  so  to  speak. 

When  it  was  necessary  and  the  reserve  got  to  42  per 
cent,  against  40  per  cent.,  and  it  was  necessary  for  the 
Federal  Eeserve  Bank  to  hold  up  a little  to  protect  their 
reserves  and  the  structure  of  credit,  we  began  to  say  to 
our  customers,  you  must  get  along  with  a little  less  money, 
you  must  reduce  your  obligations.  Our  thought  was  if 
everybody  co-operated  moderately  well,  it  would  not  hurt 
anybody,  but  at  first  those  men  believed  we  could  just 
as  well  as  not  loan  them  the  money  and  get  it  over 
there.  They  know  better  now.  It  is  to  convince  that 
thing  called  ‘‘public  opinion^’  which  after  all  is  the  crux 
of  most  everything  we  do. 

Q.  What  I mean  was  about  when  do  you  think  defla- 
tion,— if  it  comes, — ^will  start  to  set  in? 

A.  Whenever  the  public  appreciates  the  necessity  of 
curtailing  their  lines  a little  bit  and  co-operating  with  the 
Federal  Eeserve  Board  at  Washington  in  reducing  the 
loans. 

Q.  In  case  there  is  deflation  in  the  currency  would 
that  have  any  effect  on  the  situation  such  as  we  are  deal- 
ing with  here,  in  your  opinion? 

A.  Yes,  I think  it  would.  The  trouble  is  now  I think 
there  has  been  a little  strained  condition,  and  anything 
that  eases  that  off,  is  bound  ^to  take  this  pressure  off  of 
credit  to  a certain  extent.  In  other  words,  interest  rates 
in  Chicago  would  go  back  to  six  per  cent. 


275 


Now,  I believe  myself  that  this  deflation  will  set  in 
whenever  the  railroads  begin  to  move  the  products  from 
the  west  so  these  people  who  borrowed  this  money  can 
pay  it  back,  and  big  jobbers  and  manufacturers  in  Chi- 
cago and  other  big  cities  can  deliver  the  stuff  they  have 
already  made,  and  have  in  their  warehouses.  They  can- 
not get  credit  to  offset  until  it  gets  to  its  destination, 
and  I think  this  whole  thing,  so  far  as  the  over-extension 
of  credit  and  deflation  is  concerned,  is  very  largely  a 
transportation  problem. 

Q.  I do  not  quite  understand  what  you  said  about 
the  pre-war  scale  of  wages  and  other  expenses.  You  said, 
as  I understood  you,  it  would  not  go  back  to  the  pre-war 
basis,  but  you  did  not  indicate  your  view  as  to  whether 
it  would  remain  at  the  present  scale? 

A.  I do  not  think  it  will  remain  at  the  present  scale. 
I think  it  will  go  back  somewhere  to  approximately  near 
the  old  basis,  but  I do  not  think  we  will  get  down  to  the 
old  basis. 

Q.  You  do  not  think  it  will  go  back  to  the  old  basis? 

A.  No. 

Q.  When  do  you  look  for  a decline? 

A.  If  I could  ‘answer  that  truthfully  I would  captalize 
it. 

Chairman  Wilkerson:  You  would  quit  the  banking 
business? 

A.  Yes. 

Mr.  Cleveland:  That  is  a question  that  could  not  be 
arswered? 

A.  No. 

Q.  Not  even  approximately? 


276 


A.  T do  not  think  so.  You  ha,ve  got  the  public  senti 
ment  and  the  condition  of  the  whole  world  entering  into 
it.  You  and  I think  we  know  to  some  extent  the  condi- 
tion in  Europe.  We  do  not  know  much  about  it,  and 
those  are  all  factors  that  enter  into  it,  and  I do  not  think 
one  man’s  opinion  is  Avorth  more  than  another  man’s 
opinion. 

Chairman  Wilkerson:  Have  you  seen  these  charts 
chat  have  been  prepared  by  some  of  the  economists  based 
upon  comparison  of  the  conditions  following  the  Napole- 
oni'c  wars  and  the  Civil  War  which  show  at  least  50  per 
cent,  of  that  effect  is  for  10  years. 

Q.  I have  not  seen  the  chart  but  I know  this : Follow- 
ing the  Napoleonic  Avar  in  Europe,  the  prices  in  food 
stuffs  in  England  ran  up  to  such  extent  that  Parliament 
established  an  investigating  commission  and  they  ran 
it  doAvn  and  said  that  it  Avas  due  to  the  fact  that  the 
Bank  of  England  had  put  out  so  many  unsecured,  I mean 
uncovered  Bank  of  England  notes;  and  history  shows 
just  in  proportion  as  they  retired  those  notes  there  was 
reaction  in  the  value  of  the  cost  of  living,  and  we  had 
a somewhat  similar  situation  in  this  country,  following 
the  Civil  War.  You  Avill  recall  that  the  greenback,  which 
is  how  as  good  as  any  other  money,  sold  as  low  as  36 
cents,  as  I remember,  possibly  a fraction  more,  and  in 
those  days  it  took  a world  of  money  to  buy  anything,  and 
just  in  proportion  as  money  gets  cheap  the  commodity 
which  you  have  to  buy  with  it,  by  inverse  ratio  goes  up. 
That  is  the  trouble  here.  We  have  had  to  increase  cir- 
culation. That  was  the  beginning  before  the  Avar  af- 
fected it. 

I remember  in  March,  1917,  making  a speech  out  in 
California  and  trying  to  show  that  a good  deal  of  the 


277 


then  high  cost  of  living,  which  was  not  high,  as  we  look 
back  at  it,  was  due  to  the  over  supply  of  the  circulating 
medium  which  we  then  had.  I say  the  influx  of  one  bil- 
lion and  a half  dollars,  and  the  organization  of  the  Fed- 
eral Reserve  system,  and  all  those  things  entered  into  it. 

Q.  Now,  you  take  the  matter  of  government  bonds. 
Liberty  bonds,  they  are  way  down! 

A.  They  are. 

Q.  The  principal  bonds,  they  are  comparatively  hold- 
ing their  own,  aren’t  they? 

A.  Yes.  You  would  say,  in  comparison  with  them, 
yes. 

Q.  How  do  you  account  for  that  ditference? 

A.  Well,  I think  the  government  bonds  were  floated 
at  too  low  a rate  of  interest.  The  same  law  of  credit 
must  in  the  last  analysis  apply  to  nations  or  common- 
wealths or  municipalities  that  applies  to  a corporation  or 
individual.  If  you  borrow  one  million  dollars,  if  you  are 
a corporation  it  is  easier  to  get  it  than  fifty  million.  Our 
country  borrowed  twenty  billion,  or  twenty-five  billion  as 
a point  of  fact,  and  they  borrowed  it  at  a rate  which  was 
below  a proper  ratio  with  other  investments.  I can  say, 
as  I think  every  other  banker  can  say — ^we  bankers  did 
all  we  could  to  have  the  rates  put  higher  at  the  time. 
We  contended  that  the  secretary  of  the  treasury  could 
have  sold  at  any  rate  under  the  impulse  of  patriotism, 
and  everybody  wanted  to  do  his  duty.  Everyone  was 
willing  to  offer  his  property  and  himself  to  win  the  war 
and  the  result  was  it  was  a very  easy  matter  for  the  secre- 
tary of  the  treasury  to  sell  these  bonds,  particularly 
through  the  use  of  the  Federal  Reserve  bank,  and  that  is 
one  of  our  troubles  today,  that  half  of  the  loaning  power 


278 


of  the  Federal  Reserve  Bank  is  taken  np  by  carrying  a 
billion  and  a half  dollars  of  these  bonds  and  treasury  cer- 
tificates or  government  securities  that  should  have  been 
disseminated  and  be  in  the  hands  of  the  people. 

Now,  if  those  bonds  had  been  sold  at  a high  rate  of 
interest,  they  would  have  been  disseminated  and  in  the 
hands  of  the  people  and  this  billion  and  a half  dollars  in 
the  banks  that  are  now  there  as  collateral  would  not  be 
there  and  the  Federal  Reserve  banks  under  existing  con- 
ditions would  still  have  a billion  and  a half  security  which 
they  could  extend  to  commerce,  which  they  cannot  do  now, 
because  they  have  to  carry  these  bonds. 

Q.  What  is  the  prevailing  rate,  if  you  know,  of  munic- 
ipal bonds? 

A.  I cannot  answer  that.  I am  not  personally  familiar 
with  the  details  of  any  of  those  investment  facts.  Mr. 
Abbott  would  be  much  better  able  to  answer  these  tech- 
nical questions  that  I because  he  comes  in  direct  contact 
with  it. 

Q.  You  say  these  borrowers  pay  8 or  10  per  cent, 
interest ; they  do  not  on  the  face  of  things  pay  that  much, 
do  they? 

A.  No,  it  is  in  commissions. 

Q.  Commissions.  It  doesn’t  go  above  the  legal  rate 
of  seven  per  cent,  on  the  face  of  it? 

A.  We  cannot  in  this  state. 

Q.  Now,  just  one  other  thing  I wanted  to  ask,  as  a 
matter  of  personal  satisfaction.  I understood  you  were 
trying  to  get  along  with  your  old  shoes  and  I was  wonder- 
ing if  you  got  in  the  position  where  you  had  to  buy  new 
shoes. 

A.  I did  have  to  buy  some  the  other  day  and  I paid 


279 


three  times  as  much  as  usual  and  I smiled  too.  I am 
not  buying  many,  however. 

Mr.  Einger:  Mr.  Reynolds,  you  regard  the  immediate 
present  as  critical  or  emergent  as  far  as  public  service 
corporations  are  concerned,  do  you  not? 

A.  Yes,  I do  as  to  everything  that  requires  credit. 
I would  not  limit  it  to  that  particularly,  although  I think 
it  is  more  potent  to  them  than  probably  other  things. 

Q.  Do  you  think  any  rate  making  body  is  justified 
in  using  the  immediate  present  day  prices  and  condi- 
tions as  representative  of  normal  or  basic  price  in  fixing 
rates! 

A.  Probably  not,  but  you  must  remember  your  pay- 
rolls are  going  on  today,  just  the  same,  and  other  ex- 
penses are  going  on  and  they  have  to  be  met  in  some 
way,  and  if  it  is  to  be  a loss  somebody  has  to  find  some 
w^ay  to  protect  it,  otherwise  they  would  lose  the  money 
just  the  same. 

Q.  What  I had  in  mind  was  using  them  as  a basis 
for  a permanent  rate.  If  they  are  to  be  used  at  all 
shouldn’t  they  be  used  for  the  purpose  of  temporarily 
meeting  the  situation ! * 

A.  Yes,  I should  say  it  ought  to  apply  to  anything, 
world  conditions  will  change,  and  if  a rate  established  to- 
day should  prove  to  be  too  much  it  should  be  reduced,  of 
course.  But  the  great  difficulty  in  that  situation  is,  you 
must  remember  you  are  months  behind  the  changes  in 
getting  the  rates  changed.  In  the  meantime,  to  keep  the 
men  w^ho  wait  on  you  and  say  if  you  do  not  pay  increased 
salaries  by  tomorrow  night  they  will  walk  out,  and  you 
have  to  pay  it,  and  every  time  you  have  a hearing  it  is 
that  way,  and  their  losses  are  cumulative  it  comes  to 
amount  to  a great  deal  of  money. 


280 


Q.  Do  you  think,  if  the  stockholders  are  and  have 
been  the  recipients  of  very  heavy  returns  on  their  in- 
vestments, it  would  not  he  a great  injustice  to  ask  them 
to  give  slightly  in  point  of  return  I 

A.  I do  not  know.  You  do  not  ask  the  merchant  from 
whom  you  buy  a suit  of  clothes  to  give  you  a reduction 
because  you  think  prices  are  high,  you  do  not  ask  the 
butcher  to  do  that  on  a beefsteak.  I do  not  know  why 
the  man  who  operates  the  car  to  ride  on  should  do  it 
then. 

Q.  If  an  industrial  corporation  came  to  your  bank 
for  operating  requirements  and  told  you  his  normal  re- 
quirements, and  you  were  aware  of  the  fact  that  to  main- 
tain the  same  high  dividend  rate  that  he  had  in  the  past, 
wouldn’t  you  ask  him,  before  you  granted  that  additional 
loan,  to  reduce  it. 

A.  If  we  thought  the  dividend  rate  was  too  high,  yes, 
we  would  ask  him  to  reduce  it,  certainly.  In  other,  words, 
we  would  ask  him  to  do  what  is  necessaxy  to  assure  us 
of  the  solvency  of  his  concern,  whatever  it  would  be. 

Q.  You  would  ask  him  to  help  in  raising  the  money! 

A.  Yes,  he  is  in  a position  where  he  is  helpless. 
If  he  has  to  have  one  million  dollars,  if  he  can  do  what 
is  required  of  him,  he  probably  will,  but  sometimes  they 
get  in  a position  where  they  cannot  do  it. 

Q.  Do  you  think  that  the  Public  Utility  Commission 
at  this  time,  in  these  strenuous  times  in  fixing  rates, 
should  in  any  way  fix  a rate  which  would  help  the  capital 
account  for  future  capital  requirements! 

A.  No.  I would  not  say  that,  but  that  is  a big  ques- 
tion. That  would  entail  a big  discussion  to  arrive  at  what 
is  capital  account.  No,  I would  not  think  so. 


281 


Q.  I mean  increase  additions  to  the  plant,  for  future 
growth. 

A.  I think  every  public  service  company  like  every 
business  ought  to  be  allowed  to  make  profit  enough  so  that 
there  could  be  a normal  amount  left  over  and  above 
proper  dividends  to  keep  the  physical  condition  of  their 
property  in  good  shape.  Beyond  that  I say  no. 

Q.  100  per  cent,  efficiency  would  be  called  good  shape, 
wouldn’t  itl 

A.  Yes,  it  would. 

Q.  If  on  account  of  the  growth  of  its  demands  it 
needed  expansion  physically,  to  be  evidenced  by  new 
buildings  and  new  plant,  would  you  regard  it  as  reason- 
able that  the  owners  of  that  property,  whether  it  is  pub- 
lic service  or  industrial,  should  go  out  and  help  raise 
that. 

A.  If  they  could  raise  it.  If  they  could  not  raise  the 
money  the  people  would  have  to  do  without  the  service. 
That  is  all. 

Mr.  Ringer  : That  is  all. 

Commissioner  Lucey:  I heard  you  answer  Mr.  Cleve- 
land, Mr.  Reynolds,  in  his  theoretical  question  as  to  a cor- 
poration mortgaged  for  more  than  it  is  worth,  and  being 
unable  to  function  and  the  only  remedy  was  to  get  new 
capital,  and  I wms  wondering  under  what  process  you 
would  get  new  capital  in  an  institution  of  that  kind. 

A.  I do  not  know  of  any  process  except  receivership 
and  reorganization  and  scaling  of  assets  or  securities, 
and  a new  organization.  I do  not  know  of  anything  else 
because  I do  not  think  there  is  anybody  in  this  room 
who  would  invest  his  capital,  any  new  capital  in  an 


282 


organization  that  was  mortgaged  for  more  than  it  was 
worth  to  begin  with.  I do  not  think  they  would. 

Commr.  Lucey:  That  is  my  idea.  I was  wondering 
if  you  understood  his  question  right.  That  is  all. 

Mr.  Dunbaugh : Mr.  Henry  P.  Chandler,  representing 
a large  group  of  citizens,  has  a brief  statement  to  make. 
I do  not  understand  it  is  in  the  nature  of  testimony. 

Mr.  Cleveland:  Cannot  you  finish  up  this  evidence 
first? 

Mr.  Dunbaugh:  We  have  Mr.  Henry  P.  Chandler  here 
who  will  inform  the  Commission  of  what  has  taken  place 
in  the  Association  of  Commerce  with  respect  to  a group 
of  citizens,  just  to  make  a report,  as  it  were,  on  what  has 
taken  place  and  what  has  been  done. 

Mr.  Chandler : It  won’t  take  but  just  a minute. 

The  Chairman:  You  may  proceed  if  it  will  only  take 
a minute. 

Mr.  Chandler:  Mr.  Chairman,  and  gentlemen  of  the 
Commission : A short  time  ago  a number  of  the  leading 
organizations  of  this  city,  civic  organizations  like  the 
Union  League  Club  and  Municipal  Voters’  League,  held  a 
meeting  and  decided  that  this  matter  was  of  vital  in- 
terest to  the  citizens  of  Chicago,  to  the  prosperity  and 
growth  of  the  city,  and  action  was  taken  recommending 
that  each  appoint  a member  to  serve  on  a committee  to 
consider  this  question  as  soon  as  possible,  to  formulate 
their  recommendations,  and  if  it  seemed  advisable  to 
present  them  to  this  Commission.  That  committee  has 
been  appointed,  and  in  the  near  future,  Mr.  Chairman,  we 
hope  to  come  in  here  and  make  a report. 

Mr.  Cleveland:  Is  there  any  arrangement  made  so 
there  can  be  a hearing  before  the  committee,  so  we  can 
have  both  sides  there  presented? 


283 


Mr.  Chandler:  All  the  gentlemen  who  are  appointed 
on  this  committee  will  he  disinterested  persons,  persons 
with  some  acquaintance  of  the  subject,  and  they  will 
make  a disinterested  examination  and  use  such  methods 
as  seem  to  them  proper. 

Mr.  Cleveland:  That  includes  an  opportunity  to  the 
representatives  of  the  city  to  present  their  side  of  the 
case? 

Mr.  Chandler : Probably  that  committee  would  under- 
take to  ascertain  the  position  of  the  city.  It  is  just  being 
constituted,  and  we  expect  to  hold  a meeting  in  the  course 
of  a few  days. 

Mr.  Cleveland:  I suppose  that  is  in  the  nature  of  a 
motion  to  refer  the  case  to  this  public  Commission  as  a 
sort  of  a master  in  chancery  in  bulk,  to  make  a report 
to  the  Commission  as  to  what  the  Commission  ought  to 
do,  but  I don ’t  see  how  it  could  be  of  any  assistance  to  an 
outside  body.  If  they  are  going  to  have  outside  bodies 
that  are  going  to  meet  and  formulate  things,  why,  we  will 
get  up  some  outside  bodies  to  make  investigations  and 
report  our  side  of  it,  too. 

Mr.  Chandler:  We  are  interested  as  citizens  and  we 
simply  hope  to  exercise  the  privilege  of  citizens  to  present 
our  views  on  the  matter. 

The  Chairman : We  will  dispose  of  that  question  when 
it  arises. 

Mr.  Chandler:  That  is  all,  Mr.  Chairman. 


284 


David  R.  Forgan,  a witness  herein,  having  been  previ- 
ously duly  sworn,  testified  as  follows: 

Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Forgan,  are  you  connected  with  any  other  in- 
stitutions than  the  National  City  Bank?  A.  No  other 
financial  institutions. 

Q.  Is  your  bank  interested  in  any  of  the  securities  of 
these  utilities?  A.  Yes,  sir. 

Q.  Sir?  A.  Yes. 

Q.  To  what  extent?  A.  Well,  in  round  figures  we 
have  $250,000  of  their  Connecting  Lines  bonds,  which 
we  paid  91  and  92  for.  They  are  now  worth  40,  I think. 

Q.  What  is  the  name  of  those  bonds?  A.  The  Chi- 
cago City  Connecting  Lines.  I think  I am  giving  it  the 
proper  title.  Is  that  the  right  title,  Mr.  Blair,  Chicago 
City  Connecting  Lines?  What  is  the  correct  title  of  the 
bonds? 

Mr.  Blair:  Yes,  the  Chicago  City  Connecting  Lines. 

A.  We  have  $250,000  of  them. 

. Mr..  Blair:  Collateral? 

A.  Yes,  collateral  trust  bonds.  Then  we  have  in  the 
neighborhood  of  $200,000  of  bonds  of  various  utilities,  but 
that  is  just  a sort  of  stock  on  hand.  We  don’t  have  any 
line  on  them.  We  buy  them  and  sell  them,  but  we  do  have 
at  present  a considerably  less  shrinkage  in  market  value, 
at  least  on  these  connecting  lines. 

Q.  Is  that  all? 

A.  That  is  all. 

Q.  Now,  Mr.  Forgan,  you  heard  Mr.  Reynolds’  cross- 
examination,  heard  the  questions  I asked  him? 


285 


A.  Yes,  sir. 

Q.  If  I were  to  go  through  the  same  questioning  with 
you,  you  would  answer  substantially  the  same  as  he  did? 

A.  I would,  yes. 

Q.  I think  that  is  all. 

A.  I would  be  glad  to  have  Mr.  Reynolds’  statement 
taken  as  mine. 

The  Chairman : Call  your  next  witness. 

Mr.  Cleveland:  I am  willing  to  agree,  to  save  time, 
that  each  and  all  of  these  witnesses  on  cross-examination 
would  testify  substantially  the  same  as  Mr.  Reynolds 
testified. 

The  Chairman:  I don’t  know  that  we  have  the  power 
to  agree  to  that,  except  the  witness  himself. 

Mr.  Cleveland:  All  right. 


Harry  A.  Wheeler,  a witness  herein,  having  been  pre- 
viously duly  sworn,  testified  as  follows : 

Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Wheeler,  do  you  hold  any  of  the  bonds  of  any 
of  these  companies? 

A.  Personally  I do  not. 

Q.  Your  bank? 

A.  Yes,  the  bank  has  some. 

Q.  What  ones,  Mr.  Wheeler? 

A.  I think  we  have  some  Metropolitan,  some  Chicago 
Elevated  debentures,  some  Series  B City  Railway. 

Q.  What  amounts,  approximately? 

A.  Very  small,  I should  say  an  aggregate  of  less  than 
a hundred  thousand  dollars.  Very  much  less,  probably. 


286 


Q.  Did  you  hear  Mr.  Reynolds’  cross-examination? 

A.  Yes. 

Q.  If  you  were  asked  in  detail  would  you  concur  sub- 
stantially in  what  he  said? 

A.  I would  not  care  to  have  the  record  show  that  I 
accepted  Mr.  Reynolds’  testimony  as  an  entire  exposition 
of  this  question,  nor  any  other  man’s  testimony.  There 
are  shades  of  opinion  that  we  may  have,  and  I don’t  pro- 
pose to  go  on  record  as  accepting  anyone’s  testimony  but 
my  own.  I am  sorry,  Mr.  Cleveland,  not  to  be  able  to 
shorten  the  time  of  the  Commission  in  that  way,  but  I 
can’t  do  it. 

Q.  Does  your  bank  have  savings  accounts  ? 

A.  Yes. 

Q.  What  rate  do  you  pay? 

A.  The  same  as  he  stated. 

Q.  Three  per  cent.? 

A.  Yes. 

Q.  And  you  have  deposits  by  the  city? 

A.  We  do. 

Q.  You  bid  on  those  at  the  beginning  of  the  year? 

A.  Yes. 

Q.  What  rate  do  you  pay? 

A.  I presume  the  same  rate  that  was  stated,  from 
two  and  a quarter  to  three,  probably,  two  and  a half  to 
three,  varying  upon  the  activity  or  dormancy  of  the  ac- 
count. 

Q.  Have  you  any  of  the  taxes,  any  of  the  money  on  de- 
posit by  the  county  treasurer  now  in  your  bank? 

A.  I think  so. 


287 


Q.  What  rate  are  you  paying  him? 

A.  I think  two  and  a half. 

Q.  That  is  the  taxes  that  were  collected? 

A.  It  is  money  recently  coming  in,  Mr.  Cleveland.  I 
will  also  say  we  have  a good  deal  more  owing  to  us  by 
the  city  that  we  would  like  to  get. 

Q.  That  is  on  the  tax  anticipation  warrants  that  you 
loaned  last  year? 

A.  Partly. 

Mr.  Cleveland:  I think  that  is  all. 

Commissioner  Luoey : That  is  all. 

The  Chairman:  Have  you  any  further  examination? 

Mr.  Bangs : There  are  two  more  witnesses  here — Mr. 
Schweppe  and  Mr.  Corey. 


Chester  Corey,  a witness  herein,  having  been  previously 

duly  sworn,  testified  as  follows: 

Cross-Exammation  hy  Mr,  Cleveland. 

Q.  Mr.  Corey,  have  you  got  any  of  these  bonds,  your 
concern? 

A.  Wily,  the  Harris  Trust  & Savings  Bank  has  been 
very  closely  identified  with  the  first  mortgage  issue  of 
the  Chicago  Railways  Company,  Series  A,  some  of  the 
first  mortgage  bonds  of  the  City  Railway.  Just  how 
many  we  own  I don  T know.  A great  many  of  them  have 
passed  through  our  hands. 

Q.  Any  other? 

A.  Just  what  do  you  mean  by  ‘‘any  other’ ^? 

Q.  Other  bonds  than  those? 


288 


A.  The  Surface  Lines,  you  mean? 

Q.  Surface  Lines,  or  the  elevated,  or  the  telephone 
company? 

A.  We  have  been  closely  identified  with  the  financing 
— by  that  I mean  the  bond  issues — of  the  telephone  com- 
pany and  the  first  mortgage  bonds  of  the  Chicago  Eail- 
ways.  We  have  some  of  the  A bonds,  we  have  some  of  the 
first  mortgage  bonds  of  the  City  Railway,  and  at  one  time 
we  were  owners  of  some  of  the  junior  bonds  of  the  Chi- 
cago Railways,  but  they  have  been  disposed  of  long  since. 
Our  main  identification  is  simply  the  two  first  mortgage 
issues. 

Q.  You  heard  Mr.  Reynolds’  testimony? 

A.  I only  heard  the  last  part  of  it,  Mr.  Cleveland. 

Q.  You  carry  savings? 

A.  Yes. 

Q.  What  rates  do  you  pay? 

A.  Three. 

Q.  What  do  you  pay  on  checking  accounts? 

A.  That  is  usually  a matter  of  special  arrangement. 
A great  many  checking  accounts  we  pay  no  interest  on; 
others  we  pay  some.  I am  not  familiar  with  the  detail  of 
that,  Mr.  Cleveland. 

Q.  Do  you  know  the  maximum  amount? 

A.  No,  I do  not. 

Q.  Did  you  bid  for  city  money? 

A.  I assume  we  did.  I don’t  know. 

Q.  Do  you  know  how  much  you  get  of  the  county 
treasurer’s  money? 

A.  No,  I do  not. 


289 


Q.  Do  you  know  what  the  prevailing  rate  of  interest 
is  on  municipal  bonds? 

A.  Of  course  it  varies  according  to  the  size  and  credit 
of  the  municipality,  hut  I think  around  5 per  cent. 

Mr.  Cleveland : That  is  all. 

The  Chairman:  Call  the  next. 

Chaeles  a.  Schweppe,  a witness  herein,  having  been  pre- 
viously duly  sworn,  testified  as  follows: 

Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Schweppe,  you  are  an  investment  banker? 

A.  Yes. 

Q.  What  are  the  prevailing  rates  on  municipal  bonds  ? 

A.  We  do  not  deal  in  many  municipal  bonds,  but  I 
should  say,  to  make  an  estimate,  5 to  6 per  cent. 

Mr.  Cleveland:  That  is  all. 

The  Chairman : Call  your  next  witness. 

Mr.  Dunbaugh : Mr.  Hulbert  was  due  here  at  a quar- 
ter to  twelve.  He  will  be  here  any  minute. 

Mr.  Cleveland:  I am  willing  to  agree  Mr.  HulberCs 
cross-examination  will  be  substantially  the  same. 

Mr.  Dunbaugh : We  can’t  agree  for  Mr.  Hulbert. 

Mr.  Cleveland:  You  can  agree  for  the  purpose  of  this 
ease.  It  isn’t  a question  of  binding  the  witness  at  all. 

Mr.  Ringer  : Will  that  conclude  this  hearing? 

Mr.  Bangs : Yes. 

The  Chairman : We  will  take  a recess. 

(Whereupon  a short  recess  was  taken.) 


290 


E.  D.  Hulbert,  a witness  herein,  having  been  previously 

duly  sworn,  testified  as  follows : 

Cross-Examination  by  Mr.  Cleveland. 

Q.  Mr.  Hulbert,  your  banks  own  how  many  of  the  se- 
curities of  the  elevated  and  surface  lines? 

A.  I don^t  know,  I could  not  say.  Quite  an  amount, 
but  I don’t  know  how  much. 

Q.  You  mean  by  ‘‘quite  an  amount”  hundreds  or 
thousands  or  millions  of  dollars  ? 

A.  Well,  I should  say  probably  a million  altogether. 

Q.  You  were  one  of  the  trustees  appointed  under  the 
proposed  ordinance  that  was  submitted  to  the  people  in 
1918,  were  you  not? 

A.  Yes,  sir. 

Q.  And  were  you  on  there  to  represent  the  bondhold- 
ers, or  what  particular  interest,  if  any,  did  you  have? 

A.  To  tell  you  the  truth  I don’t  know  who  got  me  on 
there. 

Q.  Does  your  bank  have  savings  accounts? 

A.  Yes,  sir. 

Q.  What  rate  of  interest  do  you  pay? 

A.  Three  per  cent. 

Q.  Has  there  been  any  change  in  that  rate  since  the 
war  began? 

A.  No,  sir. 

Q.  How  long  has  that  rate  prevailed? 

A.  Well,  all  the  time  practically,  as  far  back  as  I 
know. 


291 


Q.  Did  you  bid  in  the  beginning  of  the  year  for  city 
deposits? 

A.  Yes,  sir. 

Q.  What  rate? 

A.  I am  not  sure  about  city  deposits,  I think  the  bid 
was  for  county  deposits.  I think  it  was  two  and  a half 
per  cent. 

Q.  And  for  the  county  treasurer? 

A.  The  same. 

Q.  Two  and  a half  per  cent.? 

A.  Two  and  a half  per  cent. 

Q.  That  is  the  money  that  the  treasurer  has  collected 
for  taxes,  is  it  not? 

A.  Yes,  sir. 

Q.  What  is  the  prevailing  rate  of  interest  on  munici- 
pal bonds? 

A.  Well,  I should  say  they  are  selling  around  a 6 per 
cent,  basis.  I think  that  is  what  you  can  get  for  munici- 
pal bonds. 

Q.  What  is  the  prevailing  rate  in  Chicago  on  deposits, 
general  deposits? 

A.  Two  per  cent.,  2 to  3 per  cent. 

Q.  How  much  of  a balance  would  there  have  to  be 
carried  to  get  that? 

A.  There  is  no  rule  among  the  banks ; each  bank  has 
its  own  methods  of  doing  that. 

Q.  Now,  assuming  that  a utility  is  mortgaged  for  all 
it  is  worth,  all  its  property  is  worth,  would  it  be  possible 
to  get  any  further  loans  from  the  banks  ? 

A.  If  it  was  mortgaged  for  all  it  was  worth? 


292 


Q.  All  its  property  was  worth,  yes. 

A.  I think  it  would  he  difficult. 

Q.  Would  it  he  y3ossihle,  is  it  within  the  possibilities 
of  g-etting  any  loans  ? 

A.  I should  say  not,  no. 

Q.  Assuming  that  the  people  that  are  interested  in 
the  prior  lien  would  consent,  and  the  stockholders  would 
consent  to  a first  mortgage  on  the  property,  then  it  would 
be  possible  to  get  money,  would  it  not? 

A.  You  are  speaking  of  public  utilities  in  general? 

Q.  Any  one.  That  is,  if  you  can  get  a first  lien,  in 
order  to  get  money  you  would  have  to  have  new  money, 
in  such  a situation  as  I have  described,  you  would  have 
to  have  somehow  or  other  a first  lien  to  displace  what 
is  already  on  there. 

A.  What  is  already  on  there? 

Q.  Yes. 

A.  Well,  of  course  if  you  could  displace  the  first  lien 
that  is  already  on  there  you  would  have  no  trouble  in 
getting  more  money. 

Q.  That  is  the  only  way  it  could  he  done? 

A.  I think  so.  Understand  what  I say,  you  would 
have  to  displace  not  only  the  junior  certificate,  but  the 
prior  lien  also. 

Q.  Yes,  so  as  to  make  the  new  mortgage  the  first 
mortgage  ? 

A.  For  the  amount  of  the  new  mortgage,  yes. 

Q.  Yes. 

A.  I think  that  would  be  necessary. 

Q.  As  I understand  your  direct  testimony,  I am  not 


293 


quite  sure  that  I remember  it,  taking  the  case  of  a public 
utility  that  has  abundant  assets,  that  company  can  get 
money  necessary  for  its  business  provided  it  pays  the 
rate  that  is  required,  isn’t  that  true? 

A.  Yes,  I think  it  would  be  true.  The  rate  would 
be  very  high,  of  course. 

Mr.  Cleveland:  Yes.  I think  that  is  all. 

The  Chairman : That  is  all. 

Mr.  Dunbaugh:  Mr.  Chairman,  at  the  last  Chicago 
hearing  in  this  matter  Mr.  Richberg  made  a statement 
in  the  record.  I have  prepared  a short  reply  to  Mr. 
Richberg’s  statement  which  I don’t  care  to  read,  but 
which  I would  like  to  tile  here,  which  is  in  the  nature 
of  argument,  legal  argument. 

(Colloquy  omitted.) 

The  Chairman:  You  may  file  that. 

The  Chairman:  Let  the  record  show  that  this  hear- 
ing is  adjourned  subject  to  the  further  order  of  the  Com- 
mission. 

The  Chairman : Leave  has  been  given  Mr.  Dunbaugh 
to  file  that.  If  you  care  to  file  anything  in  reply  to  it 
you  may  bring  it  in  and  leave  will  be  given  to  you  when 
presented. 

Mr.  Bangs:  Mr.  Chairman,  I understand  the  civic 
organizations  are  going  to  make  some  report. 

The  Chairman : If  there  is  any  further  hearing  notice 
will  be  given  to  all  parties. 

Mr.  Cleveland:  I want  to  put  in  evidence  here  that 
the  evidence  otfered  in  the  Surface  Lines  case  by  Ex- 
Congressman  Wharton  to  the  effect  that  the  companies 
themselves  made  a political  issue  of  the  Surface  Lines 


294 


and  the  Elevated,  at  the  time  that  this  ordinance  of  1918 
was  submitted,  be  considered  in  this  hearing. 

(Colloquy  omitted.) 

The  Chairman:  Is  there  any  objection  to  this  record 
showing  that  Mr.  Cleveland  offers  to  introduce  the  same 
testimony  that  he  offered  to  introduce  in  the  Surface 
Lines  case,  and  that  the  testimony  is  rejected? 

The  Chairman : The  record  may  so  show.  The  state- 
ment which  was  made  here  about  politics  and  their  rela- 
tion to  the  utilities  of  this  state  was  made  with  reference 
to  the  utility  companies.  The  evidence  as  to  what  a 
particular  utility  may  have  done  in  the  way  of  attempt- 
ing to  secure  the  passage  of  some  ordinance  is  no  more 
material  than  would  be  the  testimony  brought  in  here 
tending  to  show  the  New  York  Central  or  Rock  Island 
Railroad  have  maintained  a lobby  in  Washington.  The 
point  of  the  testimony  was  that  as  a result  of  these  con- 
ditions, however  they  may  have  arisen,  there  would  be 
difficulties  affecting  credit  in  the  way  of  obtaining  money. 
Let  the  record  so  show. 

Now,  is  there  anything  further? 

Mr.  Cleveland:  I haven’t  anything  further  in  this 
general  hearing  at  this  time. 

(Colloquy  omitted.) 

(Whereupon  the  further  hearing  of  the  above  entitled 
matter  was  continued  generally  subject  to  the  further 
order  of  the  Commission.) 


295 


Chicago,  Illinois. 

Friday,  June  18,  1920, 

10 :00  o ’clock  a.  m. 

Hearing  met  pursuant  to  adjournment. 

Present : Same  as  before. 

Commissioners:  J.  H.  Wilkerson,  presiding; 
Walter  A.  Shaw, 

P.  J.  Lucey. 

Chairman  Wilkerson:  You  have  some  matter,  Mr. 
Poole? 

Mr.  Poole : Mr.  Chairman,  and  Members  of  the  Com- 
mission, it  will  only  take  a few  minutes  to  explain  that 
we  wish  to  present  a memorial  on  the  public  utilities  sit- 
uation in  Chicago.  This  memorial  was  prepared  and 
has  been  endorsed  by  eight  of  the  leading  civic  associa- 
tions in  this  city,  representing  in  membership,  over  15,000 
citizens,  and  I believe  it  fairly  represents  a major  part 
of  the  public  opinion  of  this  city. 

I have  prepared  three  copies,  Mr.  Chairman,  thinking 
you  might  wish  to  have  one  copy  for  the  use  of  Mr.  Cleve- 
land, who  represents  the  city  administration  in  these  mat- 
ters. Unfortunately,  he  is  not  present. 

Chairman  Wilkerson : Did  you  advise  him  that  you  in- 
tended to  present  it? 

Mr.  Poole:  No,  I did  not. 

Mr.  Roberts : Mr.  Cleveland  is  over  before  Judge  Hol- 
dom  this  morning.  I did  not  know  this  matter  was  com- 
ing up.  I am  here  trying  the  Tegtmeier  case. 

Chairman  Wilkerson : At  the  time  of  the  general  hear- 


296 


iiig  Mr.  Poole  stated  that  at  some  time  he  might  desire 
to  present  something  of  that  kind.  I suggested  when  it 
was  presented  that  a copy  be  prepared  for  the  use  of 
your  office,  so  that  you  can  have  it  and  if  you  care  to 
make  any  response,  or  take  any  action  with  reference  to 
it,  you  have  the  opportunity. 

Mr.  Roberts : We  have  no  objection  to  the  receiving  of 
the  document. 

Mr.  Poole:  There  are  three  copies,  Mr.  Chairman. 

Mr.  Roberts : I want  to  explain  I do  not  know  any- 
thing about  this  case.  I came  here  on  the  Tegtmeier 
case,  and  that  is  how  I happened  to  be  here. 

Mr.  Poole:  Most  of  the  gentlemen  present  are  repre- 
sentatives of  the  various  organizations  and  will  say  the 
signing  is  proper. 

Chairman  Wilkerson : Let  the  record  show  in  this  gen- 
eral hearing  this  statement  is  received  and  filed. 

(Which  said  document,  last  above  referred  to,  so 
offered  and  received  in  evidence,  as  aforesaid,  is  in 
the  form  following,  to  wit:) 

^^To  the  Honorable, 

‘‘The  State  Public  Utilities  Commission  of  the 
“State  of  Illinois. 

“There  are  now  pending  before  the  honorable 
body  many  applications  by  public  utilities  operating 
throughout  the  state  for  increases  in  rates  and  for 
other  financial  relief. 

“It  is  a matter  of  common  knowledge  and  expe- 
rience that  the  utilities  operating  in  Illinois,  and  es- 
pecially those  in  the  City  of  Chicago,  have  been  un- 
able to  fully  meet  the  demands  of  the  public  for 
extensions  and  betterments  to  their  properties  and 
that  with  few  exceptions,  the  quality  of  the  service 
rendered  is  unsatisfactory. 

“Our  information  is  that  conditions  now  obtain- 


297 


iiig  will  increasingly  become  worse  unless  immediate 
relief  is  afforded. 

“The  financial  status  and  need  of  the  various  utili- 
ties are  well  known  to  your  honorable  body,  as  well 
as  the  present  state  of  the  money  market,  which  pre- 
vents even  the  stronger  companies  from  obtaining 
additional  capital  in  large  amounts  except  at  exceed- 
ingly high  rates  of  interest.  These  conditions,  as 
a matter  of  business  judgment,  will  cause  the  utili- 
ties to  make  only  the  absolutely  necessary  extensions 
and  leaves  them  totally  unable  to  anticipate  future 
needs. 

“This  inability  to  comply  with  the  demands  for 
public  service  is  not  only  a serious  and  continuing 
menace  to  the  commercial  development  of  Chicago 
but  some  of  our  citizens  are  in  imminent  danger  of 
being  deprived  of  necessary  light  and  heat  in  their 
homes  and  transportation  to  and  from  their  places 
of  business  or  where  they  are  employed. 

“Under  the  law  the  State  Public  Utilities  Com- 
mission is  vested  with  the  general  supervision  of  all 
our  public  utilities,  including  full  responsibility  for 
service,  adjustment  of  rates,  and  the  finances  of  the 
operating  companies. 

“We  are  well  aware  of  the  grave  character  of  the 
questions  with  which  the  Utilities  Commission  has  to 
deal  and  of  the  great  injury,  not  only  to  the  private 
interests  but  to  the  public  at  large,  that  may  result 
from  errors. 

“The  rates  for  service  established  by  the  commis- 
sion must  be  reasonable  both  to  the  public  and  to  the 
utilities,  and  a just  and  reasonable  rate  is  neces- 
sarily a question  of  sound  business  judgment  rather 
than  one  of  legal  formula.  The  real  test  of  the  jus- 
tice and  reasonableness  of  any  rate  is  that  it  should 
be  as  low  as  possible  and  yet  sufficient  to  induce  the 
investment  of  capital  in  the  business.  Such  rate 
must  often  be  tentative  since  exact  results  cannot 
be  foretold, 

“We  realize  full  well  that  the  case  of  every  utility 
must  rest  upon  its  own  facts. 

^‘We  shall  not  enter  into  the  realm  of  controversy 
as  to  the  causes  underlying  the  present  condition 


298 


of  public  utilities  in  Illinois,  neither  shall  we  offer 
any  plan  or  plans  for  the  solution  of  the  many  diffi- 
cult problems  continuously  presented  to  this  com- 
mission. We  do,  however,  earnestly  urge  the  neces- 
sity of  immediate  relief,  for  we  confidently  believe 
that  unless  prompt  action  is  taken  even  the  present 
unsatisfactory  public  service  cannot  be  maintained. 

‘‘We  respectfully  suggest  that  in  all  cases  where 
it  is  impossible  for  the  commission  to  give  the  case 
presented  such  an  exhaustive  consideration  as  will 
enable  the  commission  to  determine  and  prescribe  a 
permanent  rate  or  plan  respecting  the  utility  under 
consideration,  that  tentative  orders  be  entered  cov- 
ering experimental  or  temporary  periods  until  such 
time  as  the  experience  of  the  commission  or  further 
investigation  and  deliberation  will  enable  your  hon- 
orable body  to  do  complete  and  full  justice  in  the 
premises.’’ 

“E.  J.  Kane,  President, 

Chicago  Association  of  Credit  Men; 

“Moses  Greenebaum,  President, 

Citizens  Association  of  Chicago; 

■ “Howard  Elting,  President, 

' Commercial  Club ; 

“Wm.  Nelson  Pelouze,  President, 

Illinois  Manufacturers  Association; 

“Eobert  F.  Carr,  President, 

Industrial  Club  of  Chicago; 

“William  W.  Baird,  President, 

Chicago  Chamber  of  Commerce ; 

“E.  E.  Dolton,  President, 

Traffic  Club; 

“John  Fletcher,  President, 

Union  League  Club.” 

Chairman  Wilkerson:  Is  there  anything  to  be  added 
to  the  statement  which  has  been  made  by  Mr.  Poole,  by 
any  gentleman  present?  You  may  indicate,  Mr.  Eoberts, 
if  you  care  to  file  anything  in  response  to  it. 

Mr.  Eoberts : In  the  absence  of  Mr.  Cleveland,  I would 
not  want  to  make  any  statement  at  all  relative  to  this 


299 


matter.  It  is  not  within  province  to  do  so.  The  mat- 
ter is  a general  subject  and  I do  not  know  whether  or 
not  it  will  or  will  not  have  any  effect  or  bearing  upon 
the  cases  we  are  interested  in.  We  can  determine  it  only 
by  examining  the  document.  If  it  does,  and  these  gen- 
tlemen who  have  signed  this  are  willing  to  subject  them- 
selves to  the  ordinary  cross-examination  that  we  give 
the  other  witnesses  who  appear  in  cases,  we  will  be  glad 
to  take  that  matter  up  at  that  time.  If  it  has  no  bearing 
upon  any  particular  ease  we  are  not  interested  in  it.  If 
it  has  any  bearing  on  any  of  the  three  or  four  cases  that 
the  city  is  primarily  interested  in,  then,  of  course,  we 
desire  to  cross-examine  the  gentlemen  who  have  signed 
this  document. 

Mr.  Poole:  Some  of  the  gentlemen  here  have  asked 
that  we  give  the  names  of  the  various  organizations  that 
have  signed  and  approved  the  document. 

Chairman  Wilkerson:  You  may  do  that,  for  the  pur- 
pose of  the  record. 

Mr.  Poole:  Thank  you.  They  are  : 

R.  J.  Kane,  president  of  the  Chicago  Association  of 
Credit  Men,  with  3,057  members; 

Moses  Greenebaum,  president  of  the  Citizens  Asso- 
ciation of  Chicago,  with  1,050  members ; 

Howard  Elting,  president  of  the  Commercial  Club, 
with  120  members; 

Wm.  Nelson  Pelouze,  president  of  the  Illinois  Manu- 
facturers Association,  with  2,300  members; 

Robert  F.  Carr,  president  Industrial  Club  of  Chi- 
cago, with  89  members ; 

Wyllys  W.  Baird,  president  of  the  Chicago  Associa- 
tion of  Commerce,  with  6,586  members ; 

E.  R.  Dolton,  president  of  the  Traffic  Club,  with  1,150 
members ; 

John  Fletcher,  president  Union  League  Club,  with 
1,900  members. 


300 


Chairman  Wilkerson:  Very  well,  the  statement  may 
be  filed,  and  the  hearing  will  be  adjourned  subject  to  fur- 
ther order  of  the  Commission. 

Hearing  adjourned,  subject  to  further  order  of 
Commission. 


\ 


SPRINGFIELD  HEARINGS 

State  of  Illinois. 

Public  Utilities  Commission. 

Springfield,  Illinois,  May  3,  1920. 

In  the  matter  of  proposed  general  hearings 
concerning  the  ability  of  Utilities  to  meet 
the  demands  icr  service  and  to  make  the 
necessary  enlargements  and  extensions 
therefore. 

Present : 

James  H.  Wilkerson,  Chairman. 

Prank  II.  Funk,  Commissioner. 

■ Walter  A.  Shaw,  Commissioner. 

Thos.  PI.  Dempcy,  Commissioner. 

P.  J.  Lucey,  Commissioner. 

Appearances : 

B.  P,  Alschuler,  Atty., 

On  Behalf  of  the  Utilities. 

Ralph  J.  Monroe,  Corp.  Counsel, 

On  Behalf  of  the  City  of  Decatur. 

Chairman  Wilkerson:  Pt’oceeding  with  this  general 
hearing.  The  order  providing  for  the  hearing  is  a com- 
paratively short  one,  and  in  order  that  the  exact  scope 
of  the  inquiry  may  be  understood,  so  that  those  who  have 
representations  to  make  to  the  Commission  may  keep 
within  the  limits  of  the'  order,  it  would  be  well  to  call 
attention  to  the  main  provisions  of  the  order. 

The  order  refers  to  the  requirments  of  the  Public  Util- 
ities Act  that  the  Commission  shall  have  general  super- 


300  & 


vision  of  public  utilities,  and  shall  keep  itself  informed 
as  to  the  manner  and  method  in  which  their  business  is 
conducted,  and  shall  examine  them  as  to  the  manner  in 
which  their  plants  are  operated,  in  respect  to  the  ade- 
quacy of  their  service. 

In  connection  with  hearings  now  pending  before  the 
commission,  representations  have  been  made  as  to  the 
necessity  for  the  enlargements  and  extensions  of  the 
plants  and  equipment  of  certain  utilities,  in  order  that 
they  may  be  able  to  keep  up  with  the  demands  of  the 
public  for  service  rendered  by  them.  Representations 
have  also  been  made  to  the  commission  in  connection 
with  those  hearings  as  to  the  economic  and  financial  con- 
ditions which  it  is  alleged  make  it  difficult  to  provide  the 
money  necessary  for  such  enlargements  and  extensions. 
It  is  claimed  that  the  problems  confronting  public  utilities 
are  general  in  their  nature,  and  that  the  ability  of  these 
utilities  to  meet  the  future  demands  of  the  public  is  de- 
pendent upon  the  prompt  solution  of  those  problems. 

The  order  further  represents  that  it  is  desirable  that 
specific  facts  relative  to  the  financial  difficulties  which 
are  encountered  by  these  utilities  in  making  extensions 
and  enlargements  shall  be  presented  in  order  that  the 
commission  may  have  such  facts  before  them  to  aid  in  the 
solution  of  these  problems. 

For  that  purpose  two  hearings  were  appointed,  one  in 
Chicago  and  the  other  in  Springfield.  The  one  in  Chi- 
cago was  held  on  Thursday  of  last  week,  and  the  purpose 
of  these  hearings  is  to  afford  an  opportunity  to  the  pub- 
lic utilities,  civic  associations  and  municipalities  who  may 
be  interested  in  the  situation,  to  present  to  the  commis- 
sion evidence  and  suggestions  relative  to  the  necessity 
for  enlargements  and  extensions  of  plants;  what  part 


300  c 


of  those  enlargements  and  extensions  are  now  absolutely 
indispensable  and  what  may  be  postponed  to  some  better 
time,  the  difficulties  with  which  the  utilities  are  con- 
fronted in  making  provision  for  these  necessary  enlarge- 
ments and  extensions  and  suggestions  to  the  commission 
as  general  plans,  general  policies,  which  should  be  fol- 
lowed in  dealing  with  what  is  generally  conceded  to  be  a 
serious  situation  as  to  the  future  operation  of  public 
utilities  in  this  state. 

It  perhaps  will  be  in  the  interest  of  an  orderly  and  sys- 
tematic presentation  of  these  matters  to  the  commission 
for  parties  who  have  statements  to  make  to  be  permitted 
to  complete  their  statements  without  interruptions.  We 
followed  that  plan  in  Chicago,  and  it  worked  out  very 
well.  An  arrangement  will  then  be  made,  either  later 
today,  or  at  some  other  date,  if  necessary,  for  any  desired 
further  examination  of  the  parties  who  have  made  state- 
ments by  any  one  interested  in  the  inquiry.  We  will  take 
a list  of  those  who  desire  to  be  heard  at  this  hearing.  I 
understand,  Mr.  Alschuler,  you  have  the  names  of  some 
who  desire  to  be  heard.  Will  you  give  them  to  the  re- 
porter? 

Mr.  Alschuler:  Edgar  S.  Bloom,  W.  H.  Sawyer,  B.  J. 
Denman,  and  Marshall  E.  Sampsell. 

Chairman  Wilkerson:  Any  other  interested  parties 
who  desire  to  be  heard?  You  may  give  your  names  to  the 
reporter.  A good  many  are  present  at  this  hearing  and 
it  will  be  necessary  to  insist  upon  the  observance  of  the 
rule  against  smoking.  Are  there  any  civic  associations 
or  municipalities  who  are  represented  at  this  hearing 
who  desire  to  make  any  suggestions  to  the  commission? 
(No  response.) 

You  may  proceed. 


300 


Mr.  Alschuler:  Mr.  Chairman,  in  view  of  what  has 
been  stated  by  yourself  with  respect  to  the  proceeding, 
we  have  the  same  question  we  intend  to  propound  to 
these  gentlemen  as  we  did  to  the  gentlemen  who  appeared 
in  the  Chicago  hearing.  That  will  be  all  the  question  we 
will  have  today.  I take  it  that  will  be  agreeable. 

Chairman  Wilkerson:  We  found  that  a good  way  to 
conduct  a hearing  of  this  kind  in  Chicago,  and  I think 
it  will  work  well  here. 

Mr.  Alschuler  : I suggest  that  the  witnesses  whose 
names  I mentioned  be  sworn. 

Chairman  Wilkerson:  The  witnesses  may  arise  and 
be  sworn. 

(Witnesses  sworn.) 

Edgar  S.  Bloom,  called  as  a witness  on  behalf  of  the 

utilities,  having  been  first  duly  sworn,  was  examined 

in  chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  State  your  name,  Mr.  Bloom,  your  residence  and 
your  occupation  and  business  experience? 

A.  Edgar  S.  Bloom,  Chicago,  Illinois.  I am  presi- 
dent of  the  Central  Union  Telephone  Company,  of  the 
Indiana  Bell  Telephone  Company,  and  the  Cleveland 
Telephone  Company.  I might  state  those  three  com- 
panies operate  the  Bell  System  properties  throughout 
the  states  of  Ohio,  Indiana  and  Illinois,  with  the  excep- 
tion of  Chicago  and  Cincinnati.  I have  been  in  the  tele- 
phone business  about  twenty-four  years,  since  graduat- 
ing from  college.  I first  started  with  the  New  York  Tele- 
phone Company.  I then  was  superintendent  of  the  New 
York  and  New  Jersey  Telephone  Company  in  Long 
Island  and  New  Jersey.  I then  went  to  the  Pacific  Tele- 


300  e 


phone  and  Telegraph  Company,  on  the  Pacific  Coast,  as 
general  superintendent.  That  was  about  1909.  I then 
came  back  with  the  American  Telephone  and  Telegraph 
Company  in  New  York,  and  had  general  charge  of  the 
supervision  of  plant  operations  all  over  the  United  States. 
I then  went  with  the  Southwestern  Telephone  and  Tele- 
graph Company  as  operating  vice  president,  and  then  to 
my  present  position  of  the  three  companies  I have  named. 

Commissioner  Shaw:  What  is  your  present  position? 

A.  President  of  the  Central  Union  Telephone  Com- 
pany. 

Mr.  Alschuler:  We  have  prepared  a question,  which 
I will  read : Will  you  tell  us  the  situation  of  your  com- 
pany with  regards  to  its  normal  growth  and  present  de- 
mand for  extensions  and  enlargements,  your  ability  to 
meet  this  demand,  the  amount  of  new  capital  which  this 
company  would  need  to  build  the  necessary  extensions 
to  its  plant,  and  what  experience  you  have  had  in  at- 
tempting to  secure  new  capital? 

A.  If  I may  be  permitted,  in  answering  that  question 
I want  to  go  back  a little  just  prior  to  the  time  when  this 
country  got  into  the  European  War,  to  give  an  idea  of 
one  of  the  very  important  contributing  factors  to  our 
present  situation.  About  five  months  before  we  got  into 
the  war  there  had  been  a meeting  in  Washington  between 
the  chief  engineer  of  the  American  Telephone  and  Tele- 
graph Company  and  the  heads  of  the  Army  and  Navy 
Staffs.  At  that  meeting  there  had  been  a demonstration 
given  to  these  officials  as  to  what  could  be  done  in  the  way 
of  telephonic  communication  with  the  various  navy  yards 
throughout  the  United  States,  and  within  the  space  of 
thirty  minutes  the  chief  of  staff  in  Washington  had  talked 
to  the  commandant  of  various  navy  yards  in  the 


300/ 


United  States,  and  had  talked  by  wireless  telephone  to 
two  warships.  After  this  demonstration  Chief  Engineer 
Carty  of  the  American  Company  suggested  that  the  tele- 
phone and  telegraph  companies  form  signal  corp  com- 
panies, selecting  the  officers  and  men.  This  work  was 
started  and  in  forming  these  companies  it  took  the  best 
class  of  men  that  we  had.  The  companies  were  hardly 
formed  before  war  was  declared,  and  in  a few  months 
a number  of  the  companies  went  to  France  and  the  year 
we  got  into  the  war  we  lost  so  many  men  our  force  was 
seriously  depleted. 

Turning  from  that  to  the  other  side,  to  the  action  of  the 
governmental  authorities  as  to  our  company  and  their 
general  suggestions,  on  August  1,  1917,  we  got  our  first 
instructions.  We  had  been  planning  for  this  shutdown, 
and  those  instructions,  which  were  carried  out  through- 
out the  United  States  by  the  Bell  System,  and  I think, 
in  a similar  degree  by  the  independent  companies,  estab- 
lished the  follomng  policy : 

While  the  nation  is  at  war,  all  the  efforts  and 
resources  of  the  companies  constituting  the  Bell  Sys- 
tem will  be  directed  toward  assisting  in  the  effective 
prosecution  of  the  war.  The  construction  program 
for  1918  will  be  planned  to  meet : 

(1)  Direct  military  requirements. 

(2)  Urgent  commercial  needs  which  are  auxili- 
ary to  direct  military  requirements. 

(3)  Requirements  for  public  health  and  safety. 
We  also  believe  that  we  should  not  at  present  plan 
to  make  substantial  plant  extensions  for: 

(1)  Ordinary  commercial  requirements  not  con- 
nected with  military  or  public  requirements. 

(2)  Personal  or  social  demands. 

(3)  Improving  the  commercial  status  of  the  com- 
panies in  ways  that  are  not  necessary  to  meet  mili- 
tary or  other  public  needs. 


301 


In  other  words,  we  absolutely  cut  out  everything  except 
the  public  necessity  and  the  military  necessity. 

That  was  followed  in  October,  1917,  by  a letter  from 
Secretary  of  War  Baker  to  Will  H.  Hays,  Chairman 
of  the  Indiana  State  Council  of  Defense,  and  this  letter 
I think  it  is  worth  while  to  read  to  get  the  general  pic- 
ture of  the  situation.  This  letter  is  dated  October  1, 
1917. 

“Dear  Mr.  Hays : 

The  Council  of  National  Defense  has  considered 
the  question  you  raise  in  your  recent  letter  as  to 
the  attitude  which  should  be  taken  relative  to  im- 
provements, public  and  otherwise,  which  involve 
large  construction  work,  and  recommends  as  follows : 

Every  effort  that  this  countr^^  is  capable  of  mak- 
ing should  be  applied  to  bring  the  war  to  a speedy 
and  successful  conclusion.  The  resources  of  the  coun- 
try in  a general  w^ay  may  be  said  to  consist  of  men, 
money  and  material,  and  during  the  period  of  the 
war  any  new  enterprise  or  undertaking  should  be 
tried  and  justified  by  the  test:  Will  the  men,  money 
and  material  so  applied  best  contribute  in  this  way 
to  the  winning  of  the  war? 

New  enterprises  which  are  not  fundamental  to 
the  efficient  operation  of  the  country’s  necessary 
activities  should  not  be  undertaken.  This  will  not 
result  adversely  upon  business  or  conditions  of  em- 
ployment because  every  man  and  every  resource  will 
be  needed  during  the  war.  All  effort  should  be 
centered  to  help  win  the  war. 

Very  truly  yours, 

NEWTOif  D.  Baker,  Secretary  of  War 
and  Chairman,  Council  of  National 
BefenseN 

We  in  the  meantime  had  anticipated  that  very  particular 
situation  set  forth  by  Secretary  of  War  Baker,  but  the 
matter  was  put  in  a still  more  concrete  shape  on  January 


302 


16,  1918.  The  situation  had  been  tightening  up,  and  it 
was  impossible  to  get  anything  delivered  unless  you  got 
priority  orders.  The  Priority  Committee  of  the  Council 
of  National  Defense^ — Judge  Lovett,  I think,  was  Chair- 
man— I want  to  read  the  original  letter^ — this  letter  was 
sent  to  Theodore  N.  Vail,  president;  N.  C.  Kingsbury, 
operating  vice  president  of  the  American  Telephone  and 
Telegraph  Company;  to  Newcom.b  Carlton,  president 
Western  Union  Telegraph  Company,  and  to  F.  B.  Mac- 
Kinnon, president  of  the  Independent  Telephone  Associa- 
tion of  the  United  States;  representing  substantially 
all  of  the  wire  using  companies  ‘ of  the  United  States. 
They  had  recommended  that  they  be  given  priorities  for 
material  as  essential  industries  and  in  connection  with 
materials  that  were  needed  for  war  requirements,  and  in 
reply  to  their  letter,  Judge  Lovett  said: 

“We  approve  the  program  with  respect  to  prior- 
ity to  telephone  and  telegraph  companies  outlined  in 
your  letter,  paragraphs  1 and  2,  and  the  subdivisions 
of  the  latter ; and  will  upon  application  from  time  to 
time  issue  certificates  accordingly.” 

That  covered  merely  imperative  needs,  it  was  impos- 
sible to  get  anything  for  other  needs.  That  was  fol- 
lowed on  April  4,  1919,  by  requirements  set  forth  by 
the  Federal  Beserve  Board  with  respect  to  finances,  and 
these  requirements,  these  conditions,  were  laid  down, 
among  other  important  ones  that  affected  our  situation. 

“If  the  issue  is  to  be  made  for  war  purposes  or 
to  raise  capital  in  connection  with  war  contracts 
or  war  supplies,  or  to  provide  equipment,  buildings, 
or  facilities  of  any  kind  for  war  work,  full  descrip- 
tion thereof  and  amounts  needed  therefor  should  be 
stated. 

In  all  cases  full  reasons  should  be  given  why  the 
proposed  issues  cannot  be  postponed  until  after  the 
war,  or  why  the  necessity  is  greater  than  the  para- 


303 


mount  need  of  the  National  Government  in  conserv- 
ing the  financial  resources,  materials  and  labor  of 
the  country  for  the  war/’ 

Just  prior  to  that  time  the  War  Industries  Board 
passed  the  following  resolutions : 

‘‘Now,  THEKEFORE,  BE  IT  RESOLVED  by  the  War  In- 
dustries Board  that  in  the  public  interest,  all  new 
undertakings  not  essential  to  and  not  contributing 
either  directly  or  indirectly  toward  winning  the  war, 
which  involves  the  utilization  of  labor,  material  and 
capital  required  in  the  production,  supply  or  distri- 
bution of  direct  and  indirect  war  needs,  will  be  dis- 
couraged, notwithstanding  they  may  be  of  local  im- 
portance and  of  a character  which  should  in  normal 
times  meet  with  every  encouragement. 

Be  it  FURTHER  RESOLVRD  that  in  fairness  to  those 
interested  therein  notice  is  hereby  given  that  this 
Board  will  withhold  from  such  projects  priority  as- 
sistance, without  which  new  construction  of  the  char- 
acter mentioned  will  frequently  be  found  imprac- 
ticable, and  that  this  notice  shall  be  given  wide  pub- 
licity, that  all  parties  interested  in  such  undertakings 
may  be  fully  appraised  of  the  difficulties  and  delays 
to  which  they  will  be  subjected  and  embark  upon 
them  at  their  peril.’’ 

On  August  1, 1918,  the  Bell  Telephone  System  went  un- 
der the  control  of  the  Federal  Government,  and  we  were 
again  made — it  was  again  made  clear  to  us  that  nothing 
must  be  done  except  what  was  necessary  in  winning  the 
war,  and  Post  Master  General  Burleson  in  August,  1918, 
issued  the  first  service  connection  charge,  which  was 
designed  to  be  a prohibitive  charge  order,  fixing  the 
installation  charge  at  $15  on  a telephone  where  the  rental 
was  $4.00  a month  or  over;  $10  on  a telephone  where 
the  rental  was  from  two  to  four  dollars  a month;  and 
$5.00  where  the  rental  was  under  two  dollars  a month. 
It  was  an  absolutely  repressive  measure. 


304 


In  August,  1918,  General  Squires  of  the  Signal  Coi-ps 
notified  us  that  much  of  our  material  might  be  com- 
mandeered, with  the  result  from  the  date  that  was  sug- 
gested we  restricted  the  use  of  our  supplies  to  the  ut- 
most up  to  the  time  of  the  armistice.  That  gives  a gen- 
eral picture  of  how  this  situation  developed  in  ways  abso- 
lutely beyond  the  control  of  the  public  utilities. 

After  the  armistice  was  signed,  we  could  not  immedi- 
ately start  up  again.  Our  men,  a great  many  of  them,  of 
our  important  men,  were  overseas.  We  didnT  have  the 
men  to  start  plans;  we  had  no  plans  for  financing.  By 
February  or  March,  1919,  we  were  about  ready  to  start 
on  a considerable  program.  Every  other  industry  in 
the  country  was  ready  to  go  ahead,  and  we 
found  that  we  were  immediately  competing  with  unregu- 
lated industrial  concerns  in  new  enterprises  requiring 
labor  and  material,  with  the  result,  mth  our  lim- 
ited resources,  and  no  way  of  changing  it  rapidly  to 
meet  the  situation,  we  were  forced  to  sit  idly  by  to  a 
certain  extent  and  see  these  people  take  away  these  mate- 
rials and  take  our  forces  at  prices  that  we  could  not  af- 
ford to  pay.  It  has  come  to  my  attention  time  and  again 
— I will  take  as  a concrete  example  the  case  of  a cigar 
concern  in  one  of  the  large  cities  of  Ohio,  which  had 
found  it  impossible  to  get  labor,  and  moved  to  a town  of 
20,000  population  where  we  had  fifty  operators.  The 
day  before  they  opened  they  circularized  the  town,  offer- 
ing much  higher  wages  than  we  were  paying  our  op- 
erators. We  had  to  largely  increase  our  wages  or  lose 
the  entire  force.  It  took  nearly  five  months  to  get  relief 
in  that  situation.  We  had  to  raise  wages  overnight  or 
the  town  would  have  had  no  service.  That  has  been  re- 
peated in  degrees,  not  only  with  us,  but  with  all  other 


305 


concerns  all  over  the  country.  Unregulated  concerns, 
could  pay  any  price  for  labor  and  materials  and  pass  it 
on  to  the  consumer.  We  couldn’t  do  that  without  a long 
and  laborious  proceeding  and  expensive  hearings. 

With  our  rather  indifferent  financial  showing  it  made 
it  difficult  for  us  to  go  into  the  money  markets.  In 
coming  to  that  phase  of  the  situation  I have  had  prepared 
here  from  the  commercial  and  financial  Chroncile,  which 
is  a well-known  publication,  published  in  New  York  City, 
the  security  issues  of  the  last  three  or  four  months,  show- 
ing the  sort  of  money  market  into  which  we  are  going 
for  money.  I will  mention  just  a few  of  them  to  give 
a picture  of  just  the  sort  of  a market  we  are 
going  into,  where  we  are  all  after  money.  The  In- 
ternational Products  Steamship  Company,  equipment 
trust  gold  notes,  net  7 per  cent.  The  net  earnings  of  this 
company  are  estimated  over  twenty  times  the  total  inter- 
est requirements  on  these  bonds.  It  is  a gilt  edge  secur- 
ity and  sold  at  7 per  cent. 

The  National  Plate  Glass  Company,  serial  gold  notes, 
sold  at  over  7 per  cent;  average  earnings  3f  times  the 
interest  requirements.  The  Ohio  Traction  Company  of 
Cincinnati,  collateral  trust,  three  year  gold  notes,  sold 
net  to  the  public  on  the  basis  of  7.2  per  cent.  Their  total 
net  earnings  were  6^  times  the  interest  charges.  The 
Cincinnati  Gas  and  Electric  Company,  three  year  secured 
gold  notes,  7 per  cent.  This  was  some  months  ago.  The 
net  earnings  were  3|  times  the  interest  charges.  The 
Brooklyn  Edison  Company,  over  7 per  cent.  Those  were 
bonds,  ten  year  bonds,  on  a 7 per  cent  basis.  They  are 
the  direct  obligation  of  the  Brooklyn  Edison  Company. 
The  income  for  the  last  three  years  averaged  more  than 


306 


3J  times  the  interest  on  the  company's  entire  funded 
debt. 

Commissioner  Shaw : What  are  these  other  securities, 
notes  or  short  term  bonds! 

A.  Some  of  both,  but  mostly  for  three,  five  or  ten 
years,  very  few  bonds  being  issued.  I won’t  read  the 
others,  they  are  all  of  the  same  general  character,  but  that 
money  was  secured  by  pledging  the  best  credit  of  the 
company. 

Chairman  Wilkerson:  Have  you  a more  comprehen- 
sive list! 

A.  Yes,  sir. 

Chairman  Wilkerson:  It  may  be  of  interest  and  in- 
formation to  file  that  with  the  commission  without  taking 
the  time  to  read  it. 

Mr.  Alschuler : I was  going  to  suggest  it  be  put  into  the 
the  record. 

The  Witness : In  answer  to  Commissioner  Shaw’s  ques- 
tion, I have  a circular  from  Brokaw  & Company,  which 
shows  short  term  and  long  term  industrial  and  railroad 
securities,  with  a description  of  each,  and  shows  the  rate 
at  which  they  are  being  offered  to  the  public  at  rates 
from  seven  to  eight  per  cent. 

Commissioner  Lucey:  What  date  is  that  circular! 

A.  April  of  this  year,  the  latest  date.  Those  matur- 
ing in  1921,  of  the  short  term  securities,  a large  number 
of  notes  vary  from  7 to  8.6  per  cent  return  to  the  public. 
1922 — the  Canadian  Railway  securities,  guaranteed  by 
the  Canadian  Government,  6.7  to  8.7  per  cent.  There  is 
quite  a long  list — 


Bloom  Exhibit  No.  3 — General  Hearing  at  Springfield,  111.,  May  3,  1920. 


CENTRAL  UNION  TELEPHONE  COMPANY 
ILLINOIS  DIVISION. 

COMPARISON  OF  REVENUES,  EXPENSES  AND  NET  EARNINGS 
FOR  THE  YEARS  1916  AND  1919. 


Increase  1919 
over  1916 

1916  1919  Amount  % 

Revenues  $ 2,648,640  $ 3,908,713  $1,260,073  48 

Expenses  2,170,971  3,448,804  1,277,833  59 

Net  Earnings  477,669  459,909  17,760* 

Property  12,912,396  15,969,019  3,056,623  24 

% Net  Earnings  3.7  2.7 


♦NOTE — Black  type  indicates  deficit. 


ADDITIONS  AND  BETTERMENTS  1912  to  1919 $11,258,000 

ESTIMATED  EXPENDITURES  REQUIRED  FOR  ADDI- 
TIONS AND  BETTERMENTS  DURING  NEXT  THREE 

YEARS  $10,000,000  to  $15,000,000 


STATION  GAIN. 


Sta.  Removals 

Gross  Disc.  Net  and  Changes 

1915  19,073  14,290  4,783  $85,172.51 

1916  21,729  13,485  8,244  86,490.98 

1917  26,170  ' 16,706  9,464  94,106.26 

1918  20,604  19,660  944  98,744.90 

1919  27,455  21,146  6,309  101,554.27 


Total  115,031  85,287  29,744  $466,068.92 


TOTAL  STATIONS  DECEMBER  31,  1919  114,193 


307 


’ Mr.  Alschuler : I think  perhaps  you  had  better  put  that 
in  the  record. 

(Documents  so  far  referred  to,  filed  and  marked 
Exhibits  Nos.  1,  2,  and  3,  of  this  date,  respectively.) 

The  Witness : This  is  a general  summary. 

Chairman  Wilkerson:  Call  attention  to  some  typical 
issues. 

A.  American  Telephone  and  Telegraph  Company, 
three  year,  6 per  cent  notes,  fifty  million  issue,  issued 
two  years  ago.  They  are  selling  on  an  8 per  cent  basis. 
Here  are  some  industrials,  Kennecott  Copper,  ten  years, 
selling  on  a 7.8  per  cent  basis. 

Commissioner  Lucey:  American  Telephone  and  Tele- 
graph Company,  8 per  cent! 

A.  8 per  cent  basis,  due  in  1922. 

Commissioner  Lucey:  They  Avere  7.7  in  Chicago  the 
other  day. 

A.  That  may  have  been  another  note.  I can’t  vouch 
for  these  figures.  This  is  what  the  broker  says  he  Avill 
sell  them  for.  I think  they  were  very  close  to  it  at  the 
time.  Western  Electric  Company,  five  year  convertible 
bonds,  now  selling  at  7.25.  Bell  Telephone  Company 
of  Canada — I was  familiar  with  that  company.  They 
are  a high  grade  security.  They  are  selling  on  a 7^  per 
cent  basis,  due  in  1925.  Southwestern  Bell  Telephone 
Company,  five  year  7 per  cent  convertible  gold  notes,  just 
recentty  issued — I know  that  company;  I was  vice-presi- 
dent of  it.  They  are  selling  on  a 7.6  per  cent  basis.  To  show 
you  how  good  a security  that  is,  and  what  we  have  been 


308 


paying  for  the  money,  that  is  a $25,000,000  issue,  and  is- 
sued against  property  valued  on  the  books  at  $102,000,- 
000 — they  conservatively  estimate  the  cost  to  replace  it 
— I don^t  find  the  figures — ^but  it  is  very  much  higher 
than  that;  and  the  net  earnings  are  equivalent  to  three 
times  the  interest  charges,  and  I know  that  money  cost 
the  company  over  8 per  cent  after  taking  care  of  the 
brokerage  fees.  As  a concrete  example  of  our  financing 
problem  take  a company  that  is  a million  dollar  cor- 
poration. We  estimate  that  with  our  rates  we  will  make 
8 per  cent,  $80,000  a year.  We  go  out  to  the  public  to 
finance  that  property.  We  first  issue  $500,000  in  bonds 
and  secured  notes,  being  a first  mortgage  on  the  property. 
If  we  get  that  money  at  7 or  8 per  cent,  what  are  we  going 
to  pay  on  the  second  $500,000,  which  is  speculative?  We 
can’t  get  that  for  7 or  8 per  cent.  That  is  the  position  we 
are  in  today.  We  can’t  show  earnings  that  will  attract 
people  to  the  least  secured  part  of  our  securities,  and  we 
have  already  issued  securities  which  are  a first  mortgage 
on  the  property. 

I have  had  figures  made  up  here  for  the  Illinois  division 
of  the  Central  Union  Telephone  Company,  covering  prac- 
tically the  entire  state  of  Illinois,  except  the  section  op- 
erated by  the  Chicago  Telephone  Company.  There  are  a 
few  things  here  which  illustrate  the  general  situation. 
Perhaps  you  may  like  to  look  at  this,  which  we  will  put 
in  the  record,  (Handing  papers  to  the  Commissioners.) 
To  show  you  what  difficulties  we  have  in  financing,  this 
compares  the  year  1916  with  the  year  1919.  The  figures 
at  the  top  show  the  revenues,  expenses  and  net  earnings 
of  the  properties,  and  the  per  cent  net  earnings.  For 
1916  the  per  cent  net  earnings  were  3.7  per  cent ; for  1919, 


309 


2.7  per  cent  net  earnings.  The  net  earnings  in  1916  were 
about  $478,000  ; in  1919  they  were  only  $460,000,  in  round 
numbers,  notwithstanding  that  we  added,  as  shown  on 
the  next  line,  three  millions  of  dollars  to  our  property, 
and  so  in  spite  of  the  fact  that  we  got  a rather  material 
increase  in  rates  under  the  Post  Master  General,  which 
was  effective  about  the  first  of  last  July,  and  was  later 
approved  substantially  by  this  commission ; in  spite  of  all 
that,  we  are  worse  off  today  at  the  end  of  1919  than  we 
were  in  1916,  which  was  the  year  before  we  got  into  the 
war,  and  for  this  reason  we  couldnT  market  any  securi- 
ties ; on  any  such  showing  as  that  it  would  be  impossible. 

Chairman  Wilkerson:  In  the  line  entitled  ‘‘property’^ 
for  1916  you  have  approximately  $13,000,000,  and  in  your 
line  entitled  ‘‘property’^  for  1919  you  have  approximate- 
ly $16,000,000,  does  that  indicate  $3,000,000  representing 
new  equipment,  or  does  it  represent  any  modification  of 
the  basis  on  which  the  valuation  was  made  ? 

A.  No,  no;  this  is  the  net  additions  at  actual  cost 
as  they  went  on  the  books,  what  we  actually  paid,  net 
additions  at  actual  value. 

Q.  It  does  not  involve  any  inflation  of  values,  or  any 
new  theory  of  valuation? 

A.  No;  these  are  book  figures,  which  we  can  demon- 
strate are  one  or  two  millions  less  than  original  cost, 
and  several  millions  less  than  reproduction  cost. 

Q.  The  point  I wanted  to  bring  out  was  whether  they 
represented  any  readjustment  in  values? 

A.  No,  sir;  none  whatever.  We  are  not  permitted  to 
readjust  our  values  under  the  Interstate  Commerce  Com- 


310 


mission.  The  new  additions  and  betterments  from  1912 
to  1919  were  $11,258,000.  Our  total  property  at  the  end 
of  1919  was  $16,000,000. 

In  other  words,  three-quarters  of  our  property  has 
been  built  new  since  1912.  That  is  one  very  important 
phase  of  the  telephone  situation,  our  growth  is  so  rapid 
from  year  to  year  that  we  are  continually  in  the  market 
for  new  capital  if  we  really  are  to  keep  pace  with  the 
growth  of  the  various  cities  and  the  demands  for  service. 
We  are  behind,  way  behind,  now,  as  our  plant  is  pretty 
well  congested.  This  two  and  a half  or  three  years’ 
restriction  has  absolutely  put  us  way  behind  in 
our  needs,  and  there  has  not  been  much  opportunity  to 
build  for  the  future.  At  the  present  time  we  have  held 
up  in  the  state  of  Illinois  1,500  orders  for  telephones, 
that  is  as  of  March  1st,  just  taking  Illinois  alone.  In 
the  entire  territory  of  the  company  with  which  I am  con- 
nected there  are  8,000  orders  held  up,  and  there  is  not 
any  prospect  of  connecting  a great  many  of  them  in  the 
near  future.  The  plant  that  we  should  have  today  should 
have  been  planned  for  back  in  1917.  It  takes  us  about 
three  years  for  any  large  program  of  additions,  between 
the  time  we  begin  the  engineering,  planning  our  finances, 
and  by  the  time  the  backbone  plant  is  available  so  we  can 
connect  up  the  telephones  with  drop  wires  from  day  to 
day. 

To  show  that  situation  and  what  we  need  to  get  back, 
we  should  spend  in  Illinois  within  the  next  three  years 
$10,000,000.  If  we  are  to  attempt  to  materially  bring 
the  service  to  the  basis  it  was  on  in  1915  we  should  spend 
$15,000,000 — $15,000,000  at  today’s  prices  will  not^  pro- 
vide any  more  property  than  was  provided  by  the  12  mil- 


311 


lion  we  spent  from  1912  to  1915.  I will  give  an  example 
of  this.  In  1915  or  ^16  we  had  planned  to  erect  a new 
central  office  building,  install  equipment,  in  a certain  town 
in  Illinois.  We  figured  the  cost  of  the  building  would  be 
$28,000.  We  got  into  the  war  and  couldn’t  get  a priority 
for  that  and  the  job  was  dropped.  We  are  now  figuring 
going  ahead  with  it,  and  we  have  an  approximate  esti- 
mate today  of  $60,000  for  the  same  identical  building, 
and  there  is  no  guarantee  that  we  will  get  it  for  that. 
I am  confident  we  will  not,  because  it  is  on  a cost  plus 
basis,  and  that  is  always  over  and  not  under. 

In  another  city  we  figured  on  a $140,000  addition.  We 
completed  our  figures  recently  and  the  figure  was  $350,- 
000,  two  and  half  times  as  much.  The  building  end  of  the 
proposition  is  extreme,  but  in  all  our  lines  of  work  the 
material  costs  are  from  100  to  125  and  150  per  cent  higher 
than  the  pre-war  prices.  Labor  is  from  75  to  100  per  cent 
higher.  So  it  is  a serious  problem  as  to  how  far  we 
should  go.  If  prices  go  down  within  the  next  few 
years,  it  would  be  obviously  unwise  to  burden  these  two 
particular  cities  with  this  relatively  large  investment  at 
the  present  high  costs,  but  they  are  demanding  service, 
and  we  are  up  against  it.  We  have  crowded,  we  have 
temporized  ever  since  the  war  orders  came  out,  and  there 
is  nothing  to  do  but  to  refuse  to  take  orders  or  go  ahead 
on  this  high  price  basis. 

To  come  to  the  next  proposition,  the  gain  in  sta- 
tions added  to  this  property.  This  sheet  shows  our  sta- 
tion gain  by  years  from  1915  to  1919.  I want  to  point 
out  one  very  burdensome  situation  of  the  telephone  com- 
panies in  that  connection,  the  large  number  of  discon- 
nections. During  the  period  from  1915  to  1919  the 


312 


Central  Union  Telephone  Company  in  Illinois  discon- 
nected 85,287  telephones.  That  was  practically  the  entire 
number  that  we  had  on  January  1,  1915.  In  other 
words,  the  average  life  was  two  and  a half  years.  During 
that  period  on  that  one  item  alone,  due  to  the  disconnec- 
tions, which  we  call  the  station  moves  and  changes  ac- 
count, which  just  takes  account  of  the  physical  loss,  was 
$466,000.  This  is  only  a part  of  the  cost.  There  is 
the  other  cost,  operating  expense,  directory  cost,  the 
cost  of  handling  the  new  connections  in  the  commercial 
office,  which  runs  it  much  higher.  We  are  now  burdened 
with  this  tremendous  expense  in  a great  many  cases. 
Every  time  we  take  out  a telephone  it  is  an  absolute  loss 
to  us,  which  loss  should  be  assumed  by  the  short  term 
subscriber,  and  is  now  assumed  by  all  the  subscribers  as 
a whole.  With  our  labor  and  material  at  the 
point  it  is  today,  that  is  one  of  the  very  im- 
portant things  that  ought  to  be  considered  in  this 
general  situation,  the  wasteful  use  of  the  telephone 
service.  In  one  of  the  companies  two  years  ago  they  had 
no  removal  charge  for  inside  moves.  They  put  in  that 
removal  charge,  and  in  the  first  year  they  had  the  charge 
the  cost  was  $3,000,  and  in  the  years  there  was  no  charge 
it  averaged  $15,000.  When  the  public  had  to  pay  for  it, 
they  did  not  want  to  have  all  these  unnecessary  frills 
that  are  nothing  but  a parasite  on  the  business,  and  on  the 
net  earnings  of  the  company. 

Now,  Mr.  Alschuler  points  out  that  I have  left  out  the 
question  of  finances.  In  my  experience  I have  had  this  sit- 
uation to  deal  with : Our  Indiana  property,  and  all  of  the 
Indiana  properties  of  the  Bell  Company — formerly 
operated  by  four  or  five  separate  corporations;  there  was 


313 


the  property  operated  by  the  Central  Union  Company, 
which  was  a distinct  company,  being  an  Illinois  corpora- 
tion ; there  was  the  Southern  Indiana  and  several  others. 
It  was  proposed  to  combine  these  companies  into  one 
concern  under  the  jurisdiction  of  the  Indiana  Commis- 
sion, involving  $28,000,000  of  property. 

In  connection  with  the  financing  of  that  company  I en- 
deavored to  issue  $6,000,000,  three-year  7 per  cent  notes. 
This  was  started  last  October.  I had  a tentative  bid  in 
October  964.  Finally  we  got  an  order  through  the  commis- 
sion, and  those  bankers  were  offering  us  95.  That  is  $6,- 
000,000  7 per  cent  notes  against  $28,000,000,  appraised  on 
a very  conservative  basis.  That  meant  we  would  have  to 
pay  nearly  9 per  cent  for  the  money.  It  would  have  been 
issued  to  the  public  at  a price  that  would  net  the  public 
7.3  per  cent,  but  with  the  brokerage  it  would  cost  us  near- 
ly 9 per  cent  for  those  notes.  If  that  first  6 million  out 
of  28  million  of  property  costs  8 to  9 per  cent  in  these 
times,  how  are  we  going  to  obtain  the  balance  of  the 
money  needed  necessary  to  extend  the  property?  I think 
that  is  all. 

Mr.  Alschuler:  Mr.  Bloom,  I want  to  ask  one  question. 
These  details  which  you  have  handed  the  reporter  to  be 
inserted  in  the  record  do  not  include  the  cost  of  the  money 
to  the  companies? 

A.  Oh,  no,  that  is  net  to  the  public.  All  brokerage, 
of  course,  is  paid  by  the  company,  and  the  cost  of  issuing 
the  securities  and  all  that  sort  of  thing,  the  engraving 
and  so  forth,  is  additional,  and  the  cost  to  the  company 
would  be  much  higher. 

Commissioner  Lucey:  I don’t  hear  any  suggestion  as 
to  the  remedy.  What  do  you  say  in  that  regard? 


314 


A.  The  first  remedy  in  my  mind  about  that  is  to  do 
just  what  Mr.  Burleson  did  at  the  beginning  of  the  war ; 
put  on  restrictive  measures  to  be  sure  that  we  do  not  get 
a lot  of  people  added  onto  our  system,  and  when  the  break 
comes,  as  it  must  come,  it  will  not  leave  ns  with  a heavy 
investment.  That  is,  our  additions  should  be  kept  to 
absolutely  the  imperative  needs.  The  second  remedy  is 
this,  to  my  mind,  when  the  commission  laws  all  over  the 
country  were  put  on  the  statute  books  nobody  ever  con- 
templated a situation  such  as  exists  today.  Conditions 
change  now  more  in  a month  than  they  changed  in  years 
before.  We  today  figure  on  a rate  schedule  we  think  is 
just  and  right,  and  in  a month  from  now  it  is  all  wrong, 
because  wages  go  up  overnight.  Nobody  can  forecast 
what  the  situation  is  going  to  be  one  month  or  two  months 
from  now.  The  second  remedy,  if  we  are  going  to  add  to 
our  plant  and  go  ahead,  is  immediate  relief  in  rate  in- 
creases, similar  to  that  in  Ohio.  There  it  is  contained  in 
a provision  of  the  statute,  we  can  file  a rate  and  in  thirty 
days  it  goes  into  effect.  If  there  is  a complaint,  the  com- 
mission suspends  the  rates  and  we  file  a bond,  so  we  are 
not  imperilled  and  the  public  is  protected.  The  case  is 
tried  later  by  the  commission.  If  the  rate  is  too  high, 
we  refund  to  the  subscriber.  I think  a great  deal  of  the 
opposition  to  rate  increases  is  to  satisfy  the  political 
desires  of  somebody,  and  some  city  solicitors  have 
fought  us  whether  or  no,  because  they  thought  that 
was  their  job.  In  some  cases  they  have  not,  because  we 
have  gone  to  the  substantial  business  interests  of  the  city 
and  we  haven’t  had  any  difficulty  in  showing  them  that 
our  need  was  serious.  If  we  go  to  the  commission  with 
long  drawn  out  hearings,  it  may  be  months  before  we  get 
an  answer,  and  in  the  meantime  our  situation  is  such 


315 


that  we  are  being  wrecked  from  day  to  day.  That  is  the 
second  j)i*oposition,  some  kind  of  quick  relief,  put  our 
schedules  in  and  put  them  in  with  a reparation  clause. 

Commissioner  Lucey:  This  commission  has  answered 
that  by  emergency  relief  orders. 

A.  Take  our  own  situation,  before  we  got  through 
with  our  last  state  rate  cases,  which  are  expensive  to  pre- 
pare^— ^we  put  them  in  good  shape,  it  means  a lot  of  work 
and  effort — before  we  were  through  with  them  we  knew 
they  were  obsolete.  We  realized  last  December  and  Jan- 
uary as  well  as  we  do  now  that  they  were  obsolete.  What 
does  that  mean?  It  means  that  the  best  men  of  the  or- 
ganization are  working  on  this  all  the  time.  It  has  been 
true  with  us  for  the  last  year  or  so  that  our  best  men  are 
giving  all  their  time  and  attention  to  the  rate  increases, 
outside  of  the  time  they  give  to  the  increase  in  wages. 
I know  that  is  true  in  my  case  as  I am  largely  occupied 
passing  on  wage  increases,  and  then  figuring  how  and 
where,  we  are  going  to  get  the  rates  to  pay  the  wage 
increases. 

The  other  point  is  restrictive  measures  to  be  certain 
we  donT  get  people  on  our  lines  and  get  loaded  up  with 
a lot  of  expensive  property,  and  then  when  the  slump 
comes  leave  us  with  the  property  and  without  the  sub- 
scribers. 

Commissioner  Lucey:  You  mean  you  should  be  per- 
mitted to  discriminate  to  whom  you  should  give  the  serv- 
ice? 

A.  Make  the  installation  charges  and  the  service  con- 
nection charges  such  as  to  prevent  people  taking  the 
service  who  really  don’t  need  it.  There  are  a great  many 
who  don’t  need  it,  because  they  take  it  for  a few  months 


316 


and  then  drop  it.  It  is  a burden  to  the  company  and  to 
the  subscriber.  I don’t  think  you  could  restrict  it  and 
say  that  Smith  needs  the  service  and  Jones  doesn’t  need 
it,  but  make  it  restrictive;  make  the  charge  $5.00.  The 
situation  is  serious. 

Q.  Have  you  any  idea  that  an  installation  charge  of 
that  kind  would  deter  any  one  really  wanting  the  tele- 
phone from  getting  it? 

A.  No,  that  is  just  the  point;  if  they  wanted  it,  but 
there  are  a great  many  people  who  will  not  pay  five  or  ten 
dollars  who  only  want  it  two  or  three  months.  If  they 
want  the  service  they  will  pay  almost  any  price.  That 
illustrates  the  situation;  the  public  will  pay  anything 
within  reason.  Every  business  man  will  pay  it,  and  we 
ought  to  have  enough  to  pay  the  wage  rate  and  have 
enough  earnings  to  enable  us  to  attract  new  capital  into 
the  enterprise. 

In  connection  with  the  question  of  net  earnings  you 
can’t  go  and  say  to  the  investor,  want  to  sell  you 
stock  in  this  company  for  $100  at  par.  It  is  approved 
by  the  Illinois  Public  Utilities  Commission.”  And  he  says, 
^‘What  rate  dividends  does  it  pay?”  ‘‘Well,  it  was  8 
per  cent  last  year.”  “What  did  you  earn?”  “It  just 
earned  8 per  cent.”  Do  you  think  he  is  going  to  invest 
in  a public  utility  that  promises  to  earn  8 per  cent,  that 
has  no  extra  earning,  when  he  can  invest  his  money  at 
10  per  cent  with  a margin  of  safety?  Here  is  the  other 
end.  The  investor,  if  he  knows  anything  about  it,  says, 
“that  one  hundred  dollars  is  to  be  used  to  purchase  new 
plant.  If  three  years  later  some  city  solicitor  who  want^ 
to  be  governor  or  state  senator,  starts  a rate  case,  what 
would  happen  to  that  one  hundred  dollar  plant  of  mine?” 


317 


I don’t  know,  the  commission  may  say  it  is  worth  $100; 
the  commission  may  say  it  is  worth  $60,  it  has  depreci- 
ated in  value.  How  am  I to  say  to  the  investor  that  he 
will  get  8 per  cent  on  the  hundred  dollars.  That  is  the 
difficulty  of  the  situation.  The  investor  wants  a private 
enterprise  where  he  is  safeguarded. 

Commissioner  Lucey:  The  trouble  is  you  are  in  com- 
petition with  concerns  which  are  unregulated? 

A.  That  is  correct. 

Q.  Reference  was  made  to  the  Associated  Simmons 
Hardware  Company,  7 per  cent  gold  notes,  secured,  of- 
fered at  71 — 

A.  Probably  the  net  earnings  are  three  times — 

Commissioner  Shaw:  Four  times. 

Commissioner  Lucey:  That  was  putting  the  trade 
mark,  including  the  Keen  Kutter  trade-mark  at  one  dollar 
for  everything.  Of  course,  the  Central  Union  Company’s 
securities  are  good,  but  the  man  in  the  street  who  is  look- 
ing for  investments  is  looking  toward  these  industrials 
that  are  paying  high  prices  and  can  pay  high  prices, 
higher  prices,  of  course,  than  you  can  pay. 

A.  You  say  our  securities  are  good? 

Q.  Yes.  A.  You  and  I wouldn’t  buy  them. 

Q.  I mean  fundamentally  good ; they  should  be. 

A.  Yes,  they  should  be. 

Q.  I don’t  mean  on  the  market  proposition. 

Chairman  Wilkerson:  Theoretically  they  are  all  right 
even  though  you  may  have  to  go  through  a lawsuit  for 
them. 


318 


Commissioner  Lucey:  There  is  no  question  in  your 
mind  or  in  my  mind  but  these  securities  are  fundament- 
ally good.  There  is  solid  property  basis  back  of  them, 
but  you  are  handicapped  by  the  conditions  under  which 
you  are  laboring  at  the  present  time. 

A.  Yes,  sir;  we  have  to  issue  them  at  higher  prices. 

Q.  All  of  that  comes  back  to  the  public  in  the  end! 

A.  Absolutely.  There  must  be  more  of  a possible  re- 
turn or  the  investor  will  not  buy. 

Chairman  Wilkerson:  Having  in  mind  that  in  times 
of  depression  or  panic  times,  the  securities  of  a public 
utility  are  in  a way  protected  by  the  legal  requirements 
that  they  shall  receive  a fair  return  upon  the  value  of 
the  property,  while  industrials  have  no  such  protection, 
it  would  hardly  be  expected  there  would  have  to  be  so 
wide  a margin  as  if  the  same  condition  obtained  for  both! 

A.  As  a matter  of  fact,  it  is  not  a protection,  it  is  a 
privilege.  For  instance,  you  fix  our  rates;  we  make  a 
showing  and  on  the  final  decision  you  say  these  rates  will 
produce  7^  or  8 per  cent  return.  They  are  figured  on 
the  general  experience  and  the  expenses  for  the  past  three 
or  four  years.  The  past  three  years  I think  has  been  a 
most  exceptional  time  in  the  history  of  our  company. 
We  have  had  no  hail  storms,  no  wind  storms,  to  destroy 
our  property.  We  get  the  rates  fixed  and  a storm  comes 
that  might  cost  us  half  a million  dollars.  Where  is  our 
protection  of  the  property!  We  have  to  go  through  a 
long  rate  case.  The  commission  is  unable  to  act — 

Commissioner  Lucey:  You  have  the  protection,  it  is 
there. 

A.  How  long  will  it  take  us  to  go  through  the  courts ! 
If  we  had  to  wait  three  or  four  years  to  get  the  last  de- 
cision we  would  have  been  ruined. 


319 


Q.  The  commission  was  reasonably  prompt  in  the 
emergency  orders,  giving  you  all  you  were  entitled  to 
expect  until  you  got  a hearing! 

A.  Yes,  sir.  I wouldn’t  say  I wouldn’t  want  the  com- 
mission to  be  conservative,  but  things  are  changing  so 
rapidly  from  day  to  day  we  can’t  go  through  the  long 
routine  of  the  ordinary  rate  case.  We  usually  have  a 
case  take  six  months  or  a year.  The  thing  is  quick  action, 
make  us  file  a bond  for  reparation  and  make  full  investi- 
gation later;  and  then  the  question  of  restrictive  meas- 
ures should  be  considered. 

Q.  You  said  a while  ago  there  is  antagonism  of  the 
utility  properties  on  the  part  of  the  public.  They  haven’t 
been  educated  to  it  any  more  than  they  have  been  edu- 
cated to  the  value  of  the  securities,  which  we  think  have 
a real  value  back  of  them.  I think  one  of  the  troubles, 
as  you  outlined  it  a while  ago,  was  before  the  commis- 
sion regulation  the  utilities  were  regulated  in  a measure 
by  municipalities,  rough  and  tumble! 

A.  Raw  politics  in  it. 

Q.  And  the  public  still  have  the  same  viewpoint  of 
that  kind  in  their  mind.  I think  along  with  other  mat- 
ters we  have  got  to  pursue  a policy  of  public  education, 
not  only  of  the  counsel  for  the  cities,  but  of  the  people  in 
the  cities.  I think  in  Illinois  that  Mr.  Burgess  or  your- 
self with  some  of  the  cities  have  taken  the  course  outlined 
and  have  gone  to  the  chambers  of  commerce  and  city 
councils  and  laid  the  cards  right  on  the  table. 

A.  Absolutely. 

Q.  That  has  been  reflected  before  the  commission  in 
less  vicious  fights.  They  have  come  here  but  they  come 
with  a better  and  clearer  understanding.  They  don’t  put 
the  burden  on  the  commission. 


320 


Comimssioner  Shaw:  I have  a letter  addressed  to  one 
of  OUT  state  senators.  I won^t  mention  the  community 
from  which  it  comes  or  to  whom  it  is  sent.  This  came 
from  an  alderman  of  a city  in  this  state.  I donT  read  the 
whole  letter,  but  he  urges  the  senator  to  abolish  the  com- 
mission and  states  that  the  utilities  board  is  worse  than 
the  Supreme  Court  of  the  United  States. 

(Discussion  had  outside  of  the  record). 

The  Witness:  Every  time  they  criticize  the  commis- 
sion for  increasing  rates  they  are  criticising  the  strength 
of  the  fire  and  life  insurance  companies.  Securities  of 
the  railroads  and  public  utilities  are  largely  held  by  the 
life  and  fire  insurance  companies.  The  man  on  the 
street  donT  realize  that. 

Commissioner  Lucey:  The  man  on  the  street  doesnT 
think  of  that  ? 

A.  No,  also  the  newspaper  men,  a lot  of  editors. 

Q.  He  may  think  of  it,  but  that  don’t  detain  him. 

A.  I doubt  it. 

(Witness  excused.) 


0.  F.  Berey,  called  as  a witness  on  behalf  of  the  utilities, 
having  been  first  duly  sworn,  was  examined  in  chief  by 
Mr.  Alschuler,  and  testified  as  follows: 

Q.  Will  you  please  state  your  name,  residence  and 
your  business  experience? 

A.  0.  F.  Berry,  Carthage,  Illinois.  I am  president  of 
the  Mississippi  Valley  Telephone  Company,  which  oper- 
ates eleven  exchanges  in  Hancock  and  adjoining  coun- 
ties; and  also  president  of  the  Independent  Telephone 
and  Telegraph  Company  in  Nauvoo,  Illinois,  in  Hancock 


321 


County.  I am  and  have  been  for  a number  of  years 
general  counsel  for  the  Independent  Telephone  Associa- 
tion of  Illinois,  and  have  for  the  last  five  years  engaged 
almost  entirely  in  advising  and  preparing  and  presenting 
to  the  commission  applications  for  rates,  bonds,  issues  of 
stock,  purchase  of  properties,  and  so  forth. 

Q.  Senator,  you  have  seen  the  question? 

A.  Yes,  sir;  I have. 

Q.  Without  reading  it,  will  you  give  your  answer? 

A.  It  will  not  be  necessary,  it  seems  to  me,  for  me  to 
go  into  any  great  detail  in  the  presentation  of  the  inter- 
ests of  the  Independent  Association,  in  view  of  the  very 
elaborate  and  able  statement  just  made.  I would  add  that 
in  the  conclusions  reached  by  the  representative  of  the 
Bell  people  our  people  are  in  hearty  sympathy  along  all 
of  those  lines.  The  history  of  the  Independent  Telephone 
Association,  or,  rather  the  independent  telephone  inter- 
ests, of  Illinois,  have  an  equally  interesting  organization. 
They  began  a good  many  years  ago,  and  they  began  in  a 
cheap  way  in  every  particular,  cheap  in  construction, 
cheap  in  rates,  and  having  but  little  value  at  the  start. 
That  we  may  get  some  idea  of  the  elements  that  enter 
into  this  financial  question  I want  to  mention  the  tre- 
mendously rapid  growth  in  the  last  few  years  of  the 
telephone  business.  One  illustration  will  show  that,  and 
a man  generally  knows  more  about  his  own  company  with 
which  he  is  connected  than  others.  The  Mississippi  Valley 
Telephone  Company  in  Carthage  when  I purchased  it  ten 
years  ago  had  99  telephones ; today  it  has  over  800.  That 
shows  the  very  rapid  growth  of  the  telephone  interests 
all  over  the  state  of  Illinois.  There  are  800  independent 
telephone  operating  companies  in  Illinois  alone.  They 
have  about  650,000  telephones.  They  have  80,000  or  a 
little  better  stockholders. 


322 


Commissioner  Lucey:  Are  you  only  speaking  for  the 
ones  that  belong  to  the  association? 

A.  Yes,  sir. 

Q.  There  are  some  that  do  not  belong? 

A.  Yes,  sir;  there  are  some  that  do  not  belong,  hut 
all  of  the  principal  ones  belong. 

Q.  Your  statement  did  not  cover  those  that  do  not 
belong? 

A.  It  may  cover  some  of  them  also.  It  may  cover 
some  of  them,  but  not  all  of  them — 80,000  stockholders 
and  about  30,000  employes.  Another  condition,  for  fear 
I forget  it,  which  I regard  as  very  important  in  the  relief 
that  the  companies  must  have,  a great  many  of  the  inde- 
pendent companies  have  been  built  and  put  in  operation 
— from  beginning  about  twelve  years  ago  a great  many 
were  built  and  in  the  following  five  or  six  years.  They 
were  built  when  material  was  cheap,  when  rates  were 
cheap,  when  there  was  not  protection  by  a commission, 
and  I want  to  add  another  thing,  for  fear  I might  forget 
it,  in  my  estimation  our  telephone  business  in  Illinois 
would  have  been  in  a great  deal  worse  condition  had  it 
not  been  for  the  Illinois  commission.  I think  that  is  the 
universal  opinion  of  the  telephone  men  of  the  state  of 
Illinois.  Prior  to  that  time  the  securities  of  the  telephone 
companies  had  no  standing.  You  couldn’t  talk  to  a 
banker  before  that  time,  as  a rule,  about  telephone  stocks 
and  bonds.  Since  they  feel,  and  as  we  feel,  we  have  a 
certain  protection,  it  has  increased  the  value  of  the  bonds 
and  stock,  and  it  has  made  the  financing  of  the  independ- 
ent companies  prior  to  the  last  year  or  so  very  much 
easier.  I mean  by  that,  conditions  and  not  the  commis- 
sion, have  made  it  hard  for  the  last  few  years. 

The  Independent  Association  lost  their  men,  just  as 


323 


well  as  the  Bell  interests,  lost  their  best  men,  and  while 
we  undertook  to  operate  with  less  operators  and  men, 
when  the  war  was  over  and  the  men  came  hack,  the 
conditions,  as  have  been  mentioned,  and  the  prices,  were 
such  that  we  could  not  get  them  and  didn’t  get  them. 
Out  of  five  or  six  men  in  our  county  that  went  to  the  war 
we  only  got  one  when  he  came  back,  we  couldn’t  afford 
to  pay  the  others  what  they  wanted.  As  to  the  operators, 
you  can  go  out  and  at  some  price  hire  a bank  clerk,  or 
hire  a stenographer,  but  you  can’t  with  any  kind  of 
money  get  a telephone  operator  until  they  are  trained. 
When  the  telephone  operator  strikes,  or  goes  into  some 
other  industry,  they  must  be  replaced  by  people  wholly 
without  experience,  and  instead  of  increasing  the  operat- 
ing force  you  decrease  it,  because  a good  operator  has 
to  sit  down  by  the  learner  and  teach  them  and  stay  right 
by  them  until  they  get  to  be  good  operators.  I mention 
that  because  they  say,  ^ ^ Give  us  good  service  and  we  will 
pay  the  price.”  We  have  got  to  have  the  price,  then  we 
can  render  the  service,  as  I view  it. 

The  rate  of  return  is  the  first  element  entering  into  the 
success  of  a telephone  business,  or  any  other  public  util- 
ity. Comparatively  few  of  the  telephone  companies  dur- 
ing the  war  came  before  the  commission  in  Illinois  for 
a raise.  They  felt,  as  I felt,  that  in  view  of  the  stress 
and  the  extraordinary  demands  made  upon  the  public  in 
their  communities,  that  we  would  let  the  rates  remain  if 
we  could,  hoping  that  the  war  would  be  over  in  a year 
or  so,  and  were  led  to  believe,  as  many  people  believed, 
that  as  soon  as  the  war  was  over  things  would  drop.  The 
result  is  that  instead  of  going  down  they  went  up ; wages 
went  up,  prices  went  up. 

The  telephones  that  at  the  beginning  of  the  war  we  in 


324 


the  country  were  paying  $10  for,  we  are  now  paying,  and 
have  paid  for  a year  or  so,  $17. 

We  would  never  have  been  able  to  finance  many  of  the 
independent  telephone  companies  in  the  state  of  Illinois 
had  it  not  been  for  the  personnel  of  the  men  who  operated 
them.  I mean  by  that  that  local  bankers  and  local  capi- 
talists lent  us  money  simply  because  they  had  confidence 
in  the  management  of  the  company,  in  the  men  that  were 
operating  them.  There  are  comparatively  few  companies 
in  Illinois  that  can  make  a showing  that  would  put  the 
bonds  and  the  stocks  of  the  company  on  the  market  in 
competition,  successful  competition,  with  industrial  con- 
cerns. I want  to  emphasize  the  fact  that  we  are  limited 
by  this  commission  as  to  our  return.  We  can  only  see 
one  remedy,  that  the  independent  companies  need,  as  I 
view  it,  a liberal  valuation  of  their  properties  and  an 
increased  rate.  Now,  what  has  happened  in  the  inde- 
pendent companies  is  this,  which  we  will 

Chairman  Wilkerson:  By  liberal  valuation  you  mean 
in  arriving  at  the  conclusions  we  should  give  greater 
weight  to  the  element  of  present  conditions  where  it  costs 
more  to  replace  properties! 

A.  Yes,  sir ; I think  we  should  be  given  credit  for  what 
it  has  cost  and  what  it  is  costing.  Of  course,  there  are 
two  schools,  one  claiming  you  should  not  have  anything 
more  for  a thing  than  you  paid  for  it,  no  matter  how 
much  higher  it  is  now.  In  the  valuation  of  the  ap- 
praisements I think  that  the  commission  should  take 
into  consideration  the  valuation  of  the  entire  thing  with- 
out reference  to  what  it  cost.  In  other  words,  with  a 
liberal  valuation  we  can  much  more  easily  finance  our 
properties.  I know  of  nothing  else  to  save  an  utility  but 
to  value  it  a great  deal  higher  than  it  has  in  the  past. 


325 


Chairman  Wilkerson : I suppose  what  you  mean  is  this, 
that  goes  to  the  very  point  of  the  big  question  before  the 
commiesion.  If  this  had  been  the  situation  over  the 
country,  that  the  values  had  gone  up  at  the  outbreak  of 
the  war,  had  gone  up  suddenly,  and  then  at  the  close  of 
the  war  they  dropped,  it  would  hardly  be  contended  that 
during  the  period  of  the  war  properties  valued  for  pur- 
poses like  this  should  be  valued  at  those  extremely  high 
prices.  But  what  has  happened  is  that  there  has  not  been 
a decrease  in  value,  but  that  the  increase  has  been  con- 
tinued, and  you  are  arguing  that  we  should  give  added 
force  to  the  increasing  value  of  the  property  if  this  scale 
of  high  prices  should  be  projected  for  a long  time  in  the 
future? 

A.  Yes,  sir;  they  have  operated  and  continued  long 
enough  to  disprove  the  fact  it  is  not  simply  up  and  then 
down.  I would  agree  with  the  commission,  Mr.  Chairman, 
if  they  had  simply  ran  a year  or  so  on  the  high  basis  and 
then  started  down  hill,  but  that  is  not  true.  What  we 
are  doing, — a great  many  companies,  when  going  un- 
der these  circumstances  to  the  commission  even  for  an 
increase  that  has  been  given,  like  Mr.  Bloom,  we  did  not 
ask  for  enough.  They  have  been  using,  for  the  purpose 
of  maintaining  themselves,  their  surplus  and  their  depre- 
ciation funds.  I am  sure  that  is  true,  that  is,  in  a large 
number  of  companies,  all  over  this  state.  It  ought  not 
to  be.  I believe  every  telephone  man  in  this  room  will 
agree  with  me.  We  have  not  suffered  from  wind  and 
sleet  storms  in  Illinois  which  usually  hurt  our  telephone 
companies.  The  Lord  has  been  good  to  us  for  five  years. 

Chairman  Wilkerson:  There  is  one  about  due  now? 

'A.  Yes,  sir;  that  is  what  we  are  anxious  about.  An- 
other matter.  I say  this  for  this  reason,  these  companies 


326 


that  have  been  running  eight,  ten  and  twelve  years,  like 
other  public  utilities,  going  without  any  repairs,  are  about 
ready  to  go  over,  and  they  must  be  very  soon  rebuilt,  or 
great  damage  result  therefrom.  We  haven ^t  a deprecia- 
tion fund  to  take  care  of  this.  Many  of  the  company’s 
funds  have  been  used  to  pay  wages,  have  been  used  to 
buy  material  and  keep  our  plants  running  as  best  they 
could,  and  they  justified  themselves  on  that  score.  All 
work  was  stopped  almost  universally  in  Illinois  when  the 
war  began,  as  I have  said,  and  the  one  thing  I would 
like  to  emphasize  before  I close : I think  I have  said  all 
I need  to  say  along  these  lines,  what  the  telephone  utili- 
ties need  is  action  just  as  quick  as  possible.  Personally 
I am  heartily  in  favor  of  a temporary  order.  I believe 
this  commission  can  do  much  for  the  telephone  interests 
of  Illinois  by  granting  us  upon  a fair  financial  showing, 
— I think  the  regular  monthly  reports  of  many  will  be 
sufficient;  I think  you  will  find  red  enough  in  many  of 
them  to  justify  the  temporary  orders. 

Chairman  Wilkerson:  You  mean  in  advance  of  the 
relief  which  has  been  granted  already? 

A.  Yes,  sir;  for  companies  that  are  just  filing  now. 
I have  in  mind  five  or  six  quite  large  companies — the 
Bureau  County  company  is  in  here,  the  Pekin  company 
is  in  here,  the  Mississippi  Valley  Telephone  Company  is 
in  here,  and  more  are  coming  in,  merely  because  they  are 
driven  to  it.  I believe  that  a temporary  order  upon  such 
a showing  as  they  can  make,  with  the  understanding — 
the  same  provision  you  have  put  in  in  the  one  or  two 
we  have  got 

Chairman  Wilkerson:  Reparation  clause? 

A.  Reparation  clause  in  case  we  don’t  make  a case. 

Commissioner  Shaw:  On  the  point  of  reparation  it 


327 


has  been  the  almost  universal  practice  of  the  commission 
not  to  require  any  bond  or  any  guarantee.  What  Mr. 
Bloom  alluded  to  was  the  practice  of  the  state  law  in 
Ohio.  What  is  your  notion  about  that,  that  we  should 
continue  trusting  to  the  credit  of  the  company  on  the 
reparations  1 

A.  Yes,  I think  so.  I think  we  ought  to  pay  it  in 
service.  If  a man  has  five  dollars  coming  to  him,  we 
should  be  ordered  by  the  commission  to  give  him  five 
dollars  additional  service. 

Q.  We  may  say  we  will  grant  the  increase  with  the 
reparation  clause,  but  in  order  to  properly  protect  the 
customers,  we  will  require  you  to  file  some  kind  of  a bond 
or  guarantee  ? 

A.  It  seems  to  me  that  the  public  is  thoroughly  pro- 
tected under  the  order,  under  our  law,  that  we  shall 
refund  a certain  amount  of  service. 

Q.  In  other  words,  the  commission  considers  you 
solvent? 

A.  Yes,  sir;  solvent  and  honest,  and  we  do  the  same 
with  the  commission.  I think  that  would  meet  it.  I Have 
had  it  from  other  men  for  the  last  year  and  a half  or 
two  years  that  these  men  have  given  their  personal  obli- 
gations, the  managers  I referred  to  a moment  ago,  have 
given  their  personal  notes  for  the  money  loaned  a great 
many  companies.  A number  of  independent  companies 
are  being  offered  for  sale,  simply  because  they  cannot 
make  both  ends  meet.  Some  of  those  needs  are  caused, 
as  was  stated,  sometimes  by  bad  management,  but  that 
is  not  true  of  many  of  them.  I feel  we  need  relief.  I 
have  personal  knowledge  of  it.  I have  business  relations 
with  at  least  150  to  200  companies  in  this  state;  I am 
present  at  the  meetings  of  the  association  members;  I 


328 


feel  that  they  all  need  what  they  are  asking  for  in  a large 
measure.  If  the  commission  can  see  their  way  clear  after 
this  hearing  to  grant  temporary  orders  at  this  time  it 
will  be  a very  big  help  to  the  companies  needing  it. 

Commissioner  Shaw;  Senator,  isn’t  it  a fact  when 
your  company,  or  any  other  company,  when  they  go  to 
market  their  securities,  the  thing  uppermost  in  the  mind 
of  the  banker  or  the  broker  purchasing  these  securities  is 
the  relation  of  the  net  earnings  to  the  carrying  charges'? 

A.  Yes,  sir;  absolutely;  that  is  true  nearly  every- 
where. The  showing  must  be  that  we  have  sufficient  earn- 
ings that  ought  to  be — our  net  earnings  ought  to  be  dou- 
ble our  amount  of  interest  and  fixed  charges. 

Q.  Whether  under  normal  times,  senator,  is  that  not 
the  fact,  that  the  utilities,  generally  speaking,  enjoying 
a monopoly,  make  their  securities  in  better  standing,  as 
compared  with  the  industrials  with  competition,  and 
sometimes  sharp  competition? 

A.  Possibly  that  would  be  one  of  the  elements  of 
worth;  I think  it  is.  I think,  however,  we  are  not  a 
monopoly  by  a long  ways,  unless  we  have  a commission 
to  keep  us  that  way.  That  is  one  of  the  elements  that 
enter  into  the  telephone  business. 

Q.  Under  the  existing  statutes,  as  far  as  the  operation 
of  the  Illinois  commission  is  concerned,  you  are  prac- 
tically a monopoly,  except  the  modification  you  may  have 
under  the  municipal  ownership  statute? 

A.  Absolutely.  I want  to  emphasize  this;  WThen  the 
people — when  you  get  down  to  the  people  in  Illinois,  the 
people  are  not  opposing  reasonable  rates,  or  the  mainte- 
nance of  the  rates  in  their  particular  communities  of  the 
utilities.  During  all  of  the  stir  that  was  furnished  in 
Bureau  County — I am  going  to  mention  this  because  it 


329 


is  public — with  all  the  stir,  when  we  had  the  hearing  we 
had  a hall  that  would  seat  250  or  300  people,  and  there 
was  not  over  50  at  any  time  there  in  the  hall.  The  people 
are  not  interested.  It  was  for  some  reason,  personal  or 
otherwise,  that  he  stirred  up  the  opposition  to  the  com- 
mission and  the  opposition  to  the  rates. 

Chairman  Wilkerson : Of  course,  everybody  who  thinks 
about  it  knows  there  is  only  one  of  two  ways  of  handling 
regulation ; one  dealing  with  the  municipalities,  and  then 
if  the  issue  arises  they  thrash  it  out  in  a suit  in  the 
federal  courts,  where  the  claim  is  made  that  the  order  is 
confiscatory.  So  there  are  only  two  methods  of  regu- 
lation ; one  is  to  have  it  done  by  some  kind  of  a commis- 
sion, as  has  been  done  generally  throughout  the  country, 
following  the  precedent  of  the  Interstate  Commerce  Com- 
mission, and  the  other,  to  go  back  to  the  antiquated 
method  of  having  them  regulated  in  the  federal  courts  on 
this  question  of  confiscation.  Intelligent  people  under- 
stand that. 

A.  I sent  out  before  I made  application  recently  to 
this  commission  for  an  increase  in  rates  3,500  letters, 
telling  them  what  we  were  going  to  do,  the  cause  for  the 
increase,  and  inviting  their  suggestions,  and  I got  two 
letters  from  the  3,500.  One  was  from  a woman  who  said 
she  was  sorry,  but  she  couldn’t  atford  to  pay  any  more; 
and  the  other  was  from  a man,  who  said,  ‘‘Why  in  the 
world  didn’t  you  do  it  long  ago?”  So  the  people  are  not 
hostile  when  they  get  the  facts. 

Mr.  Alschuler:  I was  wondering  what  your  experi- 
ence has  been  in  reference  to  the  small  company.  As  a 
matter  of  fact,  whatever  credit  they  have  had  has  been 
due  to  the  fact  that  the  men  behind  them  have  loaned 
them  their  own  credit,  isn’t  that  it? 


330 


A.  Almost  entirely,  in  a large  measure. 

Chairman  Wilkerson:  You  think  that  the  time  has 
come  where  the  issue  might  be  met  directly  whether  the 
property  of  this  state  shall  be  confiscated,  and  let  the 
people  stand  up  and  be  counted? 

A.  Yes,  sir. 

Chairman  Wilkerson : I agree  with  you.  We  will  now 
take  a short  recess. 

(Witness  excused.)  (Recess  taken.) 

Chairman  Wilkerson : You  may  proceed,  Mr.  Alschuler, 
with  your  next  witness. 

W.  H.  Sawyer,  called  as  a witness  on  behalf  of  the  util- 
ities, having  been  first  duly  sworn,  was  examined  in 

chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  Will  you  state  your  name  and  your  experience? 

A.  W.  H.  Sawyer.  I started  in  the  street  railway 
business  in  1890  in  Lincoln,  Nebraska  ; followed  through 
the  car  barn  and  all  phases  of  the  working  man  up  to  the 
general  operating,  designing  and  construction  end.  I 
spent  a number  of  years  in  consulting  engineering  work 
and  the  last  five  years  have  been  vice  president  of  the 
E.  W.  Clarke  Management  Corporation.  Since  January 
1,  1919,  I have  been  president  or  vice  president  of  the 
group  of  properties  on  the  east  side  of  the  river  at  East 
St.  Louis  and  vicinity.  There  are  seven  of  those  prop- 
erties. 

Q.  Now,  Mr.  Sawyer,  you  have  seen  this  question  that 
is  written;  it  has  been  submitted  to  you,  hasn’t  it? 

A.  Yes,  sir. 

Q.  In  so  far  as  your  experience  enables  you  to  do,  will 
you  please  answer  that  question? 


331 


A.  I will  answer  that  question  from  our  local  situa- 
tion. In  the  East  St.  Louis  group  of  properties,  the  stock 
is  owned  by  a holding  company,  the  East  St.  Louis  and 
Suburban  Company.  These  seven  companies  are  all  in 
different  stages,  different  financial  situations,  but  the 
group  last  year  just  barely  earned  the  interest  on  its 
bonded  indebtedness.  The  total  capital  stock  of  the  group 
is  $24,000,000,  one-half  bonds  and  one-half  stock.  The 
gross  earnings  were  about  five  million,  and  they  earned 
less  than  $100,000  over  and  above  the  bond  interest,  fig- 
uring it  at  five,  per  cent. 

To  come  to  your  question,  our  growth  down  there  is 
normal,  that  is,  the  growth  in  business.  As  to  the  exten- 
sions, in  the  broad  sense  of  the  word  we  have  not  made 
any,  and  are  not  contemplating  any  in  the  near  future, 
although  there  are  extensions  in  that  territory  that  are 
a necessity  to  the  civic  life  of  the  community  or  its  devel- 
opment. We  are,  in  regard  to  the  reconstruction, 
putting  in  new  rail  and  tearing  out  old,  as  must  be  done 
in  order  to  continue  the  present  service.  I haven’t  any 
figures  as  to  the  new  capital  which  the  companies  would 
need  to  build  the  necessary  extensions.  Last  year  and 
this  year  we  made  no  budgets,  something  which  has  al- 
ways been  done  before,  the  understanding  being  that  we 
would  simply  meet  the  situation  from  month  to  month  as 
it  stood,  taking  what  we  had  and  doing  the  best  we  could 
with  it. 

The  previous  practice  had  been  to  finance  our  compa- 
nies through  the  holding  company  purchasing  the  bonds 
and  stocks  which  were  issued  for  capital  improvements. 
Last  year  we  financed  only  through  our  companies.  That 
is,  I mean  no  one  has  advanced  us  money;  they  lost  con- 
fidence in  us;  the  six-cent  pieces  that  we  take  through 


332 


our  street  railway  and  the  electric  light  money  is  the  only 
money  we  had  for  capital  expenditures  and  everything 
else. 

The  Alton,  Granite  & St.  Louis  Traction  Company,  one 
of  the  seven  companies,  the  interurban  portion,  went 
into  the  federal  court  something  like  two  years  ago  on 
the  ground  of  confiscation.  The  city  lines  are  now  getting 
a rate  of  fare  as  high,  I think,  as  they  should  have  at 
present.  They  have  only  had  half  enough.  I feel  that 
they  should  have  had  it  before.  No  question  of  valuation 
was  ever  entered  into  on  that  company,  as  we  accepted 
for  temporary  purposes  the  so-called  actual  cost  ap- 
praisal of  the  commission.  We  did  that  because  so  far  we 
have  not  been  able  to  earn  in  excess  of  a fair  return  on 
that  amount.  That  company  defaulted  on  its  bond  interest 
a year  ago  last  August  and  has  paid  its  bond  interest  six 
months  late  up  until  last  February.  At  the  present  time 
it  owes  taxes,  with  no  money  to  pay  them,  and  with 
no  money  for  bond  interest.  Receiver  suits  are  filed,  and 
the  only  reason  the  bondholders  have  not  taken  over  the 
property  which  belongs  to  them  and  have  allowed  me  to 
continue  to  operate  it,  is  because  they  simply  seemed  to 
feel  we  were  doing  the  best  that  could  be  done,  and  there 
was  nothing  to  be  gained  by  taking  the  property  over. 
The  bondholders  seem  to  realize  what  we  are  up  against. 
I talk  to  large  interests  every  month,  trying  to  keep  them 
posted  on  the  last  increase  in  labor  and  when  we  hope  to 
get  an  increase  in  rates. 

The  trouble  with  the  property  to  a certain  extent,  is 
that  we  overbuilt  at  the  start,  and  since  then,  especially 
during  the  last  five  years,  our  operating  expenses  have 
simply  increased  out  of  bounds  to  the  revenue.  The  Alton 
Gas  & Electric  Company  is  a sister  company  in  that  it 
guarantees  a portion  of  the  bonds.  The  two  companies 


333 


together  are  running  two  thousand  dollars  a month  be- 
hind on  their  bond  interest,  and  we  expect  to  see  wages 
go  up  the  first  of  May. 

To  divert  just  a moment  on  the  question  of  wages. 
Take  the  motormen  and  conductors ; in  May,  1918,  we  were 
paying  those  men  31  cents ; today  we  are  paying  51  cents, 
and  have  for  one  year,  and  we  are  entering  into  arbitra- 
tion now  on  a change  of  wages  due  May  1st.  Unques- 
tionably we  are  going  to  pay  more.  Within  four  years, 
and  practically  within  five  years,  the  wages  have  been 
doubled.  That  is  true  very  largely  of  everybody  outside 
of  the  clerical  force,  and  their  wages  have  been  very 
materially  and  largely  increased. 

Another  one  of  these  companies  is  the  East  St.  Louis 
and  Suburban  Kailway  Company,  whose  passenger  de- 
partment is  now  under  the  federal  court ; went  there  last 
September.  At  the  time  we  went  I presented  a statement 
for  the  first  seven  months  of  1919,  which  showed  that 
after  paying  operating  expenses  and  taxes  we  had  $25,000 
left.  The  only  reason  we  had  $25,000  is  because  we 
didn’t  spend  the  money  that  should  have  been  spent  in 
maintaining  the  property.  We  presented  an  outside  ap- 
praisal, showing  the  so-called  minimum  original  cost 
value  to  be — I think  it  was  three  million  dollars  and  a 
half.  The  freight  department  of  that  company  has  for 
the  last  couple  of  years  made  some  money.  Three  or  four 
years  ago  we  were  not  hauling  practically  any  coal. 

The  East  St.  Louis  Railway  Company  has  been  getting 
a six-cent  fare  since  August,  1918.  It  is  a company 
where  the  riding  is  good.  The  people  in  that  town  are 
perfectly  willing  to  spend  their  money.  The  East  St. 
Louis  Railways  could  earn  an  unfairly  high  return  upon 


334 


an  unfairly  high  valuation.  It  is  one  of  those  properties 
where  the  people  could  pay  it,  and  would.  This  property 
has  36  miles  of  track,  not  properly  laid  out  for  the  city  to 
develop.  There  has  been  no  increase  in  track  mileage  in 
ten  years.  We  are  giving  exceptionally  good  service, 
always  have,  the  cars  are  in  good  shape.  We  have  bought 
only  five  new  cars  within  the  last  five  years,  and  it  was 
quite  a bit  before  that  since  any  had  been  bought,  that  is, 
for  additional  capacity.  We  have  rebuilt  some  fifty. 

East  St.  Louis  needs  better  street  car  facilities,  par- 
ticularly rail  extensions.  There  is  one  group  of  manufac- 
turers who  have  no  street  car  facilities.  The  people  feel 
they  ought  to  have  a cross-town  line,  an  outer  belt,  as  it 
were,  to  connect  the  factories  together,  so  that  a man 
living  in  one  place  would  not  have  to  come  clear  dowm 
town  to  go  to  work,  when  he  works  also  in  the  outer  belt. 
The  city  has  got  to  the  point  where  it  has  absorbed  that 
overbuilding,  and  it  is  going  ahead  with  manufactories, 
as  it  is  admirably  situated  to  do. 

The  general  situation  of  our  company  is  such  that  we 
can’t  do  anything  today.  What  I am  hoping  for  is  a 
better  condition  so  that  we  can  tend  to  restore  confidence 
and  get  back  some  day  where  we  can  actually  do  things 
again  that  need  to  be  done.  It  is  our  desire  to  do  this 
in  that  community.  It  is  our  desire  to  do  this  on  any 
practical  basis  that  can  be  done.  I often  refer  to  the 
fact  when  I took  the  presidency  of  this  company  it  was 
with  the  understanding  that  anybody  outside  would  have 
absolutely  nothing  to  do  with  it.  I was  to  go  down  there, 
devote  my  time  to  it,  live  on  the  job  and  solve  the  diffi- 
culties as  I thought  best.  Before  there  had  been  some 
question  of  management.  All  questions  I settled 


335 


locally,  after  detailed  investigation,  except  the  question 
of  the  spending  of  somebody  else’s  money  that  they  won’t 
give  us.  That  I can’t  do.  The  people  down  there  are 
saying — I think  there  is  really  a different  situation  today 
than  there  has  been  before.  They  now  say,  We  have  got 
to  have  the  extensions.”  I think  they  have  at  least  got 
to  the  point  that  they  recognize  what  I have  been  telling 
them  for  a year  or  two,  or  three,  must  he  true.  It  would 
do  some  good  if  somebody  outside  of  a railroad  man 
would  tell  them  that,  too.  What  we  have  been  stating  is 
we  couldn’t  spend  this  money.  They  need  these  exten- 
sions and  they  have  talked  to  us  about  it.  In  general 
they  are  willing  that  we  should  be  given  enough  money 
if  we  could  make  the  extensions.  I told  them  that  we 
couldn’t  get  the  money  which  it  would  take  to  operate 
and  restore  confidence  with  the  men  who  have  money,  the 
investors.  Our  past  records  do  not  give  confidence  today. 

In  connection  with  the  details  on  valuations  that  have 
been  brought  up.  I will  digress  just  for  a moment  on 
that.  I don’t  know  as  we  all  understand  when  we  refer 
to  actual  cost  valuations  and  the  present  day  price  valu- 
ation— I don’t  know  as  we  all  understand  each  other  on 
that.  I would  like  to  illustrate  that  by  our  own  condi- 
tions down  there.  Frankly,  I think  the  term  actual  cost 
valuation  as  we  have  used  it  before  the  commission,  and 
as  the  commission’s  engineers  have  used  it,  has  been  a 
misnomer  so  far  as  the  public  is  concerned,  in  that  it 
didn’t  represent  the  actual  cost.  There  are  many  other 
elements  that  enter  into  that  cost  that  have  not  been  con- 
sidered in  my  opinion.  What  is  the  actual  cost?  We  know 
what  it  is  and  what  it  has  been  since  1902  or  ’03,  or  since 
these  companies  were  formed.  They  were  not  all  formed 
at  the  same  time ; they  were  paid  for  in  stocks  and  bonds. 


336 


Since  then  we  have  kept  our  books  in  accordance  with  the 
Interstate  Commerce  Commission's  classification  and 
know  what  has  been  done.  That  is  for  fifteen  or  twenty 
years,  but  the  original  actual  cost  of  the  property  we 
donT  know,  but  we  are  in  pretty  good  position  to  know 
from  those  who  have  been  there  during  that  period.  I 
have  given  a great  deal  of  thought  to  the  actual  cost  in 
these  cases,  and  every  time  it  was  in  excess  of  the  actual 
cost  found,  leaving  out  the  going  value  and  limiting  the 
so-called  overheads  to  10  and  12  per  cent,  as  has  been 
the  case  in  most  cases  of  ours. 

In  regard  to  the  present  day  cost,  in  our  case  at  least 
that  is  not  the  peak.  We  called  in  Mr.  Hagenah  to  make 
that,  and  he  gave  very  considerable  thought  to  it.  We 
talked  it  over  after  he  had  made  his  report  on  what  he 
had  done,  and  he  said  that  his  valuation  was  not  based  on 
present  day  peak  prices.  It  was  based  on  the  new  high 
'level  as  compared  with  the  pre-war  level,  it  is  not  the 
new  prices  of  today;  it  is  lower  by  ten  per  cent,  but  it  is 
made  more  nearly  to  reflect  the  1918  to  1923  prices,  and 
the  price  average  that  will  continue  in  1922  and  ^23,  based 
on  the  studies  economists  have  made.  I speak  of  that 
because  this  present  day  cost  was  entered  into,  and  I 
donT  feel  that  is  understood. 

Getting  down  to  the  rate  increases  and  the  labor  in- 
creases; as  the  situation  is  today  we  are  at  Springfield 
and  Chicago  and  on  court  work  with  our  engineers  so 
much  that  we  are  not  doing  what  we  really  could  do  if 
we  could  really  devote  more  of  the  time  to  the  operating. 

Now,  as  to  the  question  of  rate  of  return,  we  have  no 
experience  down  there  to  guide  us.  We  had  one  witness 
on  the  stand  down  there  in  regard  to  that  who  said  that 


to  get  money  from  investment  bankers  we  should  earn 
upwards  of  ten  per  cent.  Another  witness  said  he  didn^t 
know  how  much  we  should  earn,  he  wouldn’t  have  any- 
thing to  do  with  the  securities,  yet  he  was  a man  who 
used  to  handle  public  utility  securities.  We  down  there 
have  got  to  get  a return  proportionate  to  what  other 
people  get.  In  the  meantime  our  only  means  of  financing 
will  be  from  our  earnings.  We  must  take  in  a sufficient 
amount  of  money  to  pay  the  bond  interest  if  we  can,  and 
what  money,  if  any,  there  is  left  over,  we  put  in  recon- 
struction and  capital  expenditures,  and  if  there  is 
any  money  left  that  is  sent  to  the  stockholders.  We  keep 
it  before  they  get  it,  they  don’t  loan  it  to  us.  Money  that 
has  to  be  spent  has  to  be  spent,  and  we  just  spend  it.  In 
other  words,  this  emergency  still  exists,  and  I feel  in  the 
last  month  to  a greater  degree  than  ever.  The  increases 
and  the  problems  that  we  have  been  confronted  with  in 
the  last  sixty  days  have  been  more  abnormal  than  they 
have  been  within  the  last  two  years.  The  labor  problem 
has  become  even  more  abnormal  than  before,  in  spite  of 
what  we  have  been  through.  There  is  nothing  hurts  us 
any  more  in  regard  to  the  labor  question  than  the  belief 
that  the  company  really  down  at  the  bottom  is  making 
money  somewhere.  We  are  not  and  any  statement  that 
we  are,  if  it  gets  any  semblance  of  officialdom  hurts  us. 

In  regard  to  the  plans  spoken  of  by  the  telephone  com- 
pany of  protecting  the  public,  that  would  not  be  prac- 
tical in  so  far  as  the  street  railways  are  concerned.  That 
has  been  done,  but  I wouldn’t  want  to  see  coupons  issued. 
I think  in  our  own  case  down  there  if  the  commission  in 
their  wisdom  should  give  us  the  money  they  might  re- 
strict the  uses  to  which  we  should  put  that  money.  If  a 
six-cent  fare  is  not  enough  for  a street  car  rate  give 


338 


those  companies  enough  money  from  a manufacturing 
standpoint.  Now,  we  have  got  to  have  an  increase.  If 
we  could  have  a higher  rate,  you  could  protect  the  pub- 
lic, by  giving  us  instructions  not  to  pay  but  a certain 
amount  of  the  money  out  to  the  stockholders.  In  other 
words,  no  one  would  suffer  by  it. 

Chairman  Wilkerson:  In  other  words,  create  some 
fund  then  and  use  it  for  the  purpose  of  adjusting  rates'? 

A.  Yes,  sir,  and  see  that  your  stockholders  didnH  get 
over  blank  per  cent  on  blank  dollars.  In  our  local  case 
we  have  got  to  get  some  money  somewhere.  That  is  the 
only  place  we  have  been  able  to  get  it.  We  have  got  to 
make  improvements  this  year  that  should  have  been 
made,  but  which  we  are  not  making.  We  are  going  to  do  it 
as  time  goes  on.  The  very  least  we  can  do  there  in  the 
town  is  to  spend  75  to  a 100  thousand  dollars.  Beahy  a 
lot  more  ought  to  be  spent.  Now,  in  our  case  down  there,  I 
don’t  think  we  should  go  ahead  with  radical  extensions. 
We  have  one  little  community  down  there,  Belleville,  that 
believes  we  should  spend  a half  million  in  railway  exten- 
sions. They  gave  me  a list  of  detailed  extensions,  and 
because  I didn’t  think  very  seriously  of  it  at  first,  I was 
brought  up  before  the  council,  and  I figured  it  out  seri- 
ously with  them.  We  discovered  that  the  first  item  meant 
a hundred  thousand  dollars,  and  it  paid  something  less 
than  11/lOOths  of  one  per  cent  on  the  new  investment, 
after  we  had  paid  the  operating  expenses.  There  are 
some  additions  that  should  be  made  eventually,  but  at 
the  present  time  we  can’t  make  any  extension  that  won’t 
stand  on  its  own  bottom,  and  those  that  can  we  can’t  make 
if  we  can’t  get  some  money. 

Commissioner  Lucey : Is  that  condition  really  local  to 


339 


yourself  or  is  it  typical  to  your  line  of  business  through- 
out the  state? 

A.  As  vice  president  of  the  management  corporation 
I have  more  or  less  to  do  with  a considerable  number  of 
public  utilities.  The  East  St.  Louis  companies  were  what 
we  call  pretty  sick  babies,  and  I came  down  there  to  take 
the  presidency  and  live  on  the  job,  therefore  I am  not  in 
as  close  touch  with  the  others,  but  generally  speaking, 
our  condition  is  typical  of  the  street  railway  situation. 
I could  spend  a little  time  on  the  national  street  railway 
conditions.  It  is  deplorable.  People  are  just  commencing 
to  get  to  the  point  where  they  are  appreciating  that.  The 
President  came  out  during  the  war  and  told  them,  Mc- 
Adoo  told  them,  later  any  number  of  people  told  them,  the 
War  Labor  Board  told  them  that  when  they  gave  the  men 
40  per  cent  increase  in  wages,  and  said  we  must  have 
relief.  We  have  never  got  relief.  People  are  finding  out 
that  it  has  hurt  us  more  than  it  has  helped  them.  They 
canT  hurt  us  any  more,  we  are  down  and  out.  Conditions 
have  just  got  to  the  point  where  the  commission  must  give 
us  money.  We  can’t  spend  the  money  if  we  can’t  get  it. 
People  are  commencing  to  appreciate  that  street  rail- 
ways and  the  civic  communities  are  going  down  together 
or  going  up  together;  you  can’t  separate  them.  Down 
there  we  have  got  along  because  we  started  ahead  of  the 
community.  They  have  caught  up  with  us,  however.  They 
need  the  service,  and  if  we  could  give  it  to  them  they 
would  be  mlling  to  pay  for  it,  in  spite  of  records  to  the 
contrary,  written  records  to  the  contrary. 

The  light  and  power  situation  is  not,  generally  speak- 
ing, as  deplorable  as  the  street  railways.  Generally 
speaking,  the  power  and  light  companies  were  profitable 


340 


from  their  standpoint,  which  does  not  mean  profitable  as 
non-controlled  industries  by  any  means,  but  they  are 
making  enough  money  so  that  they  ought  to  be  able  to 
finance  themselves.  They  are,  generally  speaking,  in  com- 
munities that  need  enlargements,  more  enlargements, 
which  means  putting  in  a lot  of  money.  They  are  up 
against  it,  they  can’t  get  the  money,  yet  the  investment 
looks  good.  I am  indirectly  associated  with  properties 
around  Akron,  which  is  growing  by  leaps  and  bounds. 
The  growth  is  tremendous,  of  course,  the  operating  ex- 
penses are,  too.  What  they  need  is  money.  They  had  some 
three-year  notes  they  wanted  to  refinance  to  the  stock- 
holders on  an  8 per  cent  basis,  who  ought  to  have  taken 
them,  but  they  didn ’t.  They  made  some  arrangements  to 
string  them  out  for  another  year,  hoping  for  a better 
condition.  The  light  and  power  situation  is  a big  problem 
as  to  getting  money,  but  the  street  railways  is  a bigger 
problem.  We  have  got  ourselves  in  a condition  where  we 
can’t  get  the  money,  and  it  must  be  changed  so  that  some 
time  in  the  future  we  can  get  the  money. 

Commissioner  Lucey:  Did  you  say  your  capital  was 
24  millions,  divided  half  stock  and  half  bonds  1 

A.  Yes,  sir. 

Q.  And  your  net  income  was  five  millions  ? 

A.  No,  sir;  our  gross  income.  I am  approximating 
12  million  bonds.  Five  per  cent  on  that  would  be  $600,000 
and  we  had  less  than  $100,000  after  taking  care  of  that. 
The  coal  mines  have  made  us  some  money  in  the  last  year 
or  so  because  we  have  been  hauling  some  coal,  yet  the 
Alton,  Granite  & St.  Louis,  and  the  Alton  Gas  & Electric 
Company  haven’t  met  their  bond  interest. 


341 


Q.  Can  the  street  car  company  in  East  St.  Louis 
make  any  money? 

A.  Yes,  sir;  particularly  in  that  kind  of  a community. 
It  is  a workingman  ^s  community.  They  are  good  spend- 
ers. In  other  words,  that  traffic  will  not  fall  oft,  as  the 
rate  increases,  to  any  appreciable  extent. 

Q.  Well,  aren’t  you  charging  more  than  six  cents? 

A.  No,  sir. 

Chairman  Wilkerson:  Application  asking  for  more? 

A.  We  have  an  application  asking  for  more.  That  is 
held  up  at  the  present  time,  awaiting  the  report  of  the 
commissioner’s  engineers. 

Q.  The  application  is  for  eight  cents? 

A.  The  application  is  for  eight  cents.  Of  course,  what 
is  a fair  return  on  that  property  comes  down  in  the  end 
to  a fair  valuation.  What  that  is 

Commissioner  Lucey.  Your  property  is  interwoven 
down  there? 

A.  Yes,  sir;  our  property  is  interwoven,  and  we  have 
to  stand  on  some  general  basis  rather  than  a particular 
local  basis.  If  a man  wants  to  know  what  is  a fair  rate 
of  return  on  a fair  valuation,  a fair  rate  of  fare,  it  must 
be  in  the  end  what  will  encourage  a fair-minded  man  to 
invest  in  the  enterprises.  If  they  don’t  do  that  you  have 
put  the  rate  too  low. 

Chairman  Wilkerson:  We  will  take  a recess  now  until 
2 o’clock. 

(Whereupon  a recess  was  taken  until  2 o’clock  p.  m. 
of  the  same  day.) 


342 


. Monday,  May  5,  1920,  2 p,  m. 

Hearing  reconvened: 

Pursuant  to  adjournment. 

Parties  present : Same  as  before. 

Chairman  Wilkerson : You  may  proceed,  Mr.  Alschuler. 

Mr.  Alschuler:  I would  like  to  recall  Mr.  Bloom  for 
one  question.  He  prepared  an  exhibit  this  morning  which 
I would  like  to  offer  in  evidence. 

Chairman  Wilkerson:  Very  well. 


Edgak  S.  Bloom,  a witness  on  behalf  of  the  utilities,  re- 
called, resumed  the  stand  for  further  examination  by 

Mr.  Alschuler,  and  testified  as  follows : 

The  Witness : I find  in  looking  over  my  papers  I neg- 
lected to  present  one  paper  which  compares  tax  free  and 
taxable  bonds,  which  is  one  of  the  factors  in  the  sale  of 
securities  today.  The  column  headed  ^ ‘ income,  ’ ’ with  the 
figures  3^  per  cent,  4 and  on  up  to  7,  are  the  rates  of 
return  on  a tax  free  bond.  Immediately  beneath  it  is 
given  the  rates  of  return  that  investors  would  have  to 
receive  from  bonds  that  are  not  tax  free  in  order  to  get 
the  same  net  income.  For  example,  a man  has  an  income 
of  ten  thousand  dollars  a year,  that  is  from  tax  free 
bonds  on  a five  per  cent  basis ; he  would  have  to  get  5.62 
per  cent  in  the  case  of  a bond  subject  to  the  income  tax. 
Now,  if  the  investor’s  income  was  one  hundred  thousand 
dollars  a year  clear  with  five  per  cent  tax  free  bonds,  he 
would  have  to  get  11.36  per  cent  on  a bond  subject  to 


343 


taxation.  The  real  result  of  that  is  that  it  restricts  the 
field  for  the  sale  of  securities  which  are  not  tax  free. 
The  large  investors  do  not  invest  as  they  did  before  in 
taxable  securities,  because  the  net  return  is  so  small  when 
they  pay  the  income  tax. 

Mr.  Alschuler : This  gives  no  consideration  to  the  taxes 
they  have  to  pay  to  states  and  municipalities ! 

A.  No;  purely  on  the  basis  of  the  income  tax  figures 
for  the  year  1919. 

Commissioner  Shaw : Securities  might  be  exempt  from 
state  taxes,  however? 

A.  Yes,  this  takes  into  account  only  the  federal  in- 
come tax,  which  is  the  most  important. 

Mr.  Alschuler : That  is  all. 

(Witness  excused.) 


B.  J.  Denman,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 
chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  State  your  name  and  your  business  experience. 

A.  B.  J.  Denman.  I am  president  of  the  Tri-City 
Bailway  & Light  Company,  a company  operating  the 
street  and  interurban  railways,  gas  and  electric  utilities 
in  the  group  of  communities  commonly  known  as  the  Tri- 
Cities.  That  particular  company  covers  all  the  communi- 
ties in  a radius  of  about  thirty  miles  within  the  radius  of 
that  group.  I am  also  vice  president  of  the  United  Light 
& Railways  Company,  operating  interurban  and  street 
railways,  gas,  electric  and  heating  utilities  in  eight  addi- 


344 


tional  communities  in  Iowa,  also  in  Tennessee  and  in  In- 
diana and  Michigan. 

Commissioner  Lucey:  By  Tri-Cities  you  mean  Eock 
Island,  Moline  and  Davenport? 

A.  Yes,  sir;  the  Eock  Island,  Moline  and  Davenport 
group. 

Mr.  Alschuler:  How  long  have  you  been  in  this  in- 
dustry ? 

A.  I have  been  in  the  utility  business  about  twenty- 
five  years.  As  vice  president  of  the  United  Light  & Eail- 
way  Company  I am  in  charge  of  what  might  be  called 
the  operations ; that  is,  the  operating  matters,  engineering 
and  construction,  purchasing,  preparation  of  annual 
budgets,  and  so  forth.  I am  president  of  the  Illinois 
Electric  Association  for  this  year. 

Q.  Mr.  Denman,  you  have  seen  this  question  that  has 
been  submitted  to  you,  have  you  not! 

A.  I have. 

Q.  AYill  you  proceed  to  answer  that  question  in  so  far 
as  you  can! 

A.  In  answering  that  question  I would  like  to  begin 
at  the  last  portion  of  the  question : ^‘Tell  us  what  experi- 
ence you  have  had  in  attempting  to  secure  new  capital!’’ 
As  I use  the  term  new  capital  we  have  not  been  able  to 
secure  any  new  capital  for  about  four  years.  The  only 
way  we  have  been  able  to  raise  money  is  through  the  sale 
of  short  term  notes.  These  notes  are  secured  by  33  per 
cent  excess  collateral,  and  I think  that  method  of  obtain- 
ing money  is  quite  different  from  getting  new  capital  into 
an  industry.  I have  here  a statement  showing  the  net 
cost  of  obtaining  money  for  the  United  Light  & Eailways 
Company  from  November  1, 1917,  to  date.  The  first  issue. 


345 


a million  and  a half,  24-year  notes;  second  issue — those 
are  six  per  cent  notes. 

Commissioner  Lucey:  What  did  you  sell  them  for? 

A.  Those  were  sold  to  the  public  on  a little  over  seven 
per  cent  basis.  The  net  cost  to  the  company,  however, 
including  the  company’s  expense  and  commissions,  was 
104  per  cent.  The  second  five-year,  series  of  7 per  cent 
notes  were  sold  to  the  public  around  74  per  cent.  The  net 
cost,  including  all  expenses,  was  9f  per  cent. 

Q.  When  were  those  sold? 

A.  The  date  of  the  issue,  April  1,  1919.  Then  there 
was  a one-year  note  dated  December  1,  1919,  in  the 
amount  of  a million  and  a half,  sold  to  the  public  on  a 
74  per  cent  basis;  the  cost  to  the  company  net  was  IO4 
per  cent.  We  have  just  finished  the  sale  of  two  million 
two-year  notes  to  the  public  around  7.6  per  cent,  which 
will  cost  the  company  12  per  cent.  I might  state  that 
these  notes  are  secured  by  a deposit  of  133  per  cent  of 
bonds.  Those  bonds  can  only  be  taken  down  in  the 
amount  of  75  per  cent  of  the  construction  expenditures. 
The  result  of  that  sort  of  financing  is  that  we  are  using 
up  our  equity  in  our  property,  just  as  we  are  using  up  our 
surplus  in  an  operating  way.  It  is  impossible  to  sell 
bonds  unless  we  can  show  that  we  are  earning  the  interest 
at  least  approximating  two  times,  and  the  only  way  we 
can  preserve  our  equity  in  the  property  is  by  selling 
junior  securities.  In  fact,  the  only  reason  we  have  been 
able  to  do  this  financing  is  due  to  the  fact  that  around 
1915  or  T6  we  were  able  to  sell  a large  amount  of  pre- 
ferred stock  and  a large  amount  of  unsecured  debentures. 
That  gave  us  an  equity  which  we  are  fast  absorbing. 

The  reason  that  we  are  paying  this  price  was  pointed 
out  fully  this  morning,  so  I will  not  dwell  upon  it — that 


346 


we  are  in  competition  with  industrials  which  are  earning 
very  high  rates  of  return,  and  in  addition  are  setting  up, 
very  large  amounts  for  depreciation,  and  building  up  big 
surpluses,  and  we  have  got  to  meet  that  competition.  As 
was  just  pointed  out,  the  field  has  been  restricted  on  ac- 
count of  the  flood  of  tax  exempt  securities  that  are  com- 
ing on  the  market.  That  has  cut  out  entirely  a large  field 
of  investment.  In  addition  to  that  we  have  the  feeling 
among  the  public  that  the  utility  investment  is  not  as 
secure  as  it  should  be.  That  has  been  brought  about 
largely  through  the  ranting  of  ambitious  politicians.  As 
Mr.  Lucey  was  saying,  they  are  ambitious  to  break  into 
this  building  and  similar  buildings.  Also  on  the  part  of 
greedy  lawyers  who  are  more  concerned  in  the  large  fee 
they  can  obtain  instead  of  determining  the  facts,  so  that 
is  an  additional  handicap  which  we  have  got  to  over- 
come. 

Our  bankers  formerly  specialized — Bonb right  & Com- 
pany— they  formerly  specialized  in  public  utility  securi- 
ties. At  present  they  will  not  take  on  additional  clients. 
They  only  will  take  care  of  old  customers  because  they 
feel  they  have  an  obligation  both  to  the  company  and  the 
investors.  It  is  very  fortunate  for  us  we  do  have  a con- 
nection that  takes  that  view  of  it.  In  fact,  when  we  sold 
these  notes — this  same  company  had  participated  in  the 
Texas  notes ; they  sold  those  notes  all  over  the  phone ; in 
contrast  to  that  they  say  they  have  to  go  out  and  almost 
club  their  customers  into  taking  utility  securities.  The 
selling  expense  is  so  high  they  would  rather  not  be  called 
upon  to  take  care  of  our  requirements.  -Of  course,  we 
all  realize  that  this  is  an  economic  and  not  a political 
question. 

Mr.  Alschuler:  Tell  what  the  Texas  company  is. 


347 


A.  Mr.  Alschuler  has  suggested  I tell  what  the  Texas 
company  is  for  the  record.  That  is  one  of  the  strongest 
oil  companies,  and  if  my  memory  serves  me  correctly, 
these  securities  which  were*  recently  sold  went  to  the 
public  in  excess  of  74  per  cent,  I believe  pretty  close  to 
an  8 per  cent  basis.  One  of  the  conditions  of  that  sale 
was  that  the  company  retire  some  15  million  or  more  of 
outstanding  securities  at  quite  a premium,  I believe  115, 
so  that  the  net  cost  to  the  company,  so  far  as  we  are  able 
to  determine,  was  pretty  close  to  10  per  cent,  and  that 
is  one  of  the  strongest  oil  companies  in  the  country.  So 
this  shows  the  competition  that  we  are  up  against,  and 
that  competition  secures  no  new  capital  in  the  business, 
but  merely  loans  us  money  on  a 100  per  cent  excess  col- 
lateral. 

As  Commissioner  Lucey  mentioned  this  morning,  and 
later  modified  and  corrected  the  statement,  that  there  was 
opposition  on  the  part  of  the  public  to  increases  in  public 
utility  rates.  Our  experience  has  been  rather,  I think, 
somewhat  fortunate,  and  somewhat  contrary  to  that,  and 
the  only  opposition,  as  the  commissioner  says,  was  from 
ambitious  politicians  and  people  of  that  type.  We  have 
had  several  experiences  before  this  commission,  and  I 
believe  in  almost  every  case  the  city  attorneys  stated 
they  were  willing  to  rest  their  case  entirely  in  the  hands 
of  the  commission,  but  they  wanted  the  companies  to  se- 
cure reasonable  rates.  We  had  one  exception  in  the  city 
of  Eock  Island.  The  former  mayor  came  out  for  renom- 
ination on  a five-cent  fare  platform,  but  he  did  not  even 
secure  the  nomination,  so  that  issue  was  not  as  popular 
as  he  apparently  deemed  it  would  be. 

We  had  an  experience  in  the  last  thirty  days  before  the 
Indiana  commission.  We  made  application  for  a $2.10 
gas  rate.  There  was  no  opposition  whatever.  Several 


348 


manufacturers  stated  all  they  wanted  was  that  the  rate 
should  be  just  and  reasonable  and  the  city  attorney  stated 
that  was  all  that  he  desired,  and  he  let  the  case  rest 
entirely  in  the  hands  of  the  commission,  and  he  didn’t 
take  the  trouble  to  go  to  Indianapolis  when  the  hearing 
was  finally  completed. 

In  the  city  of  Iowa  City  we  have  recently,  within  sixty 
days,  raised  the  gas  rates  to  $1.70.  We  haven’t  received 
a single  complaint.  That  is  a town  of  12,000  people.  In 
the  City  of  Ottumwa  we  had  a $1.10  gas  rate.  Within  the 
last  18  months  we  have  increased  it  successively  to  $1.25, 
$1.35  and  $1.50.  I am  going  there  tonight  and  we  will 
make  application  and  unquestionably  secure  $1.75. 

Commissioner  Lucey.  Common  council! 

A.  Common  council.  In  Iowa  the  rates  are  under  the 
jurisdiction  of  the  council.  The  point  I wanted  to  bring 
out  was  these  rates  are  being  secured  practically  without 
protest,  on  showing  of  necessity.  We  secured  13  or  14 
months  ago  a six-cent  fare  in  the  city  of  Cedar  Rapids, 
Iowa,  by  a popular  vote.  I believe  that  was  the  first 
large  city — I say  large  city.  Cedar  Rapids  has  a popula- 
tion of  a little  less  than  fifty  thousand;  but  those  cases 
indicate  that  the  public  is  not  especially  concerned,  not 
unduly  concerned,  about  utility  rates.  They  appreciate, 
apparently,  that  the  cost  of  utility  service  is  a very  small 
portion  of  their  budget.  In  fact,  I should  say,  in  my 
opinion,  that  including  all  utility  services,  gas,  electric 
and  railway,  it  would  not  exceed  five  per  cent  of  the  av- 
erage family’s  budget.  Taking  that  into  account,  if  our 
rates  were  increased  in  proportion  to  the  decreased 
power  of  the  dollar,  they  would  still  be  almost  negligible 
in  the  average  family’s  budget.  In  view  of  the  compar- 
atively small  increases  in  the  past,  they  have  been,  I be- 


349 


lieve,  really  negligible.  So  much  for  the  cost  of  money 
and  the  effect  of  increased  rates  to  the  public.  This  mat- 
ter has  been  discussed  so  fully  I think  I need  only  give 
my  opinion  as  to  the  necessary  relief.  We  have  got  to 
have  the  money  if  the  people  are  to  be  served.  They  are 
more  interested  in  service  than  in  rates,  and  we  feel  that 
the  only  thing  necessary  to  restore  confidence  in  public 
utility  securities  is  an  adequate  rate,  and  an  adequate  rate 
is  one  which  will  attract  the  necessary  money  to  the  busi- 
ness. If  there  is  to  be  an  error  on  the  part  of  the  com- 
mission, I think  the  commission  might  better  err  in  fixing 
a rate  too  high  rather  than  too  low,  because  we  believe  that 
surplus  is  ab^lutely  necessary  to  tide  us  over  the  peri- 
ods which  we  experience  of  having  frequently  and  very 
rapidly  increasing  costs.  We  have  been  paying  in  the 
Tri-Cities  what  we  felt  was  a top-notch  wage  in  our  rail- 
way, sixty  cents  an  hour.  The  newspaper  reports  in  the 
last  day  or  so  indicate  that  the  men  are  going  to  demand 
82  cents  an  hour.  The  contract  expires  the  first  of  next 
month.  There  must  be  some  way  to  meet  those  expenses, 
those  increasing  expenses,  promptly  and  adequately,  and 
if  there  is  to  be  any  delay,  personally  we  believe  that  an 
emergency  relief,  as  was  suggested  this  morning,  would 
be  a desirable  way  to  meet  it.  If  it  is  not  met  that  way 
it  might  be  met  through  an  adequate  surplus  to  give  us 
slack  through  some  considerable  period,  to  allow  us  to 
meet  the  new  conditions.  I don’t  think  any  commission 
need  fear  the  companies  will  be  paid  too  much,  because 
all  the  money  companies  can  get  nowadays  is  a neces- 
sary return  to  the  property  to  take  care  of  the  necessary 
extensions. 

We  are  facing,  and  I hope  we  will  be  able  to  postpone 
them,  some  very  large  expenditures  in  Moline,  Rock  Is- 
land and  East  Moline.  These  expenditures,  if  they  are 


350 


required  this  year,  and  they  require  $400,000  as  I recall, 
are  due  almost  entirely  to  prospective  paving.  I believe 
we  will  be  able  to  convince  the  cities  that  those  paving 
projects  should  be  abandoned.  If  they  go  through  it 
means  we  shall  have  to  spend  a very  large  amount  of 
money,  and  there  will  be  no  increase  in  revenue  from  that. 
It  will  take  all  the  money  out  of  our  depreciation  reserve ; 
in  fact,  I can’t  say  whether  it  will  be  big  enough,  and 
increase  the  capital  charges  without  any  increase  in  earn- 
ings. That  is  one  of  the  serious  things  that  faces  the 
railway  company.  In  addition  to  that  is  the  very  great 
increase,  or  rather  request  for  increase  on  the  part  of 
the  trainmen. 

Commissioner  Lucey:  Do  you  find  in  your  experience 
that  the  streets  on  which  the  street  car  tracks  ejctend  are 
often  paved  which  would  not  be  paved  if  the  street  car 
tracks  were  not  there  1 

A.  Our  universal  experience  is  that  the  first  streets 
to  be  paved  are  the  streets  on  which  the  tracks  are  lo- 
cated, because  with  a double  track  we  pave  eighteen  out 
of  the  thirty  feet.  That  is  almost  our  universal  experi- 
ence. That  is  a burden  from  which  we  should  be  relieved, 
but  it  is  not  probably  within  the  power  of  the  commis- 
sion to  give  us  that  relief,  but  I do  believe  that  the 
city  officials  are  somewhat — are  right  alive  to  the  seri- 
ousness of  the  situation,  and  these  paving  projects  may 
possibly  be  postponed ; we  certainly  hope  so. 

We  believe  if  we  are  to  go  on  we  must  receive  a rate 
which  will  attract  the  investor,  and  it  must  be  a rate 
which  the  investor  believes  to  be  just  and  reasonable, 
and  which  will  be  a rate  to  give  us  enough  to  attract 
capital  to  the  business,  if  we  are  going  to  grow.  We  are 
not  only  using  up  the  surplus,  but  we  are  using  up  the 


351 


capacity  in  our  plants,  because  property  in  Illinois  today 
is  working  at  100  per  cent  capacity  pins.  It  keeps  an 
operating  man  on  the  verge  of  nervous  collapse  because 
we  do  not  know  wbat  minute  we  are  going  to  have  some 
trouble,  and  we  have  some  pride  in  giving  uninterrupted 
service,  but  it  has  certainly  got  to  the  point  where  we 
can’t  continue.  It  does  mean  that  rates,  utility  rates, 
have  got  to  be  measured  in  the  future  more  in  the  light 
of  the  purchasing  power  of  the  dollar.  That  dollar  today 
as  a wholesale  commodity  is  worth  about  42  cents  of  the 
pre-war  value.  We  have  found  in  communities  where  we 
are  putting  up  our  gas  rates  the  necessity  of  putting 
them  at  a point  which  approximates  the  value  of  the 
dollar  today  as  compared  with  the  value  of  the  pre-war 
dollar,  if  we  are  to  keep  the  plants.  The  big  problem,  as 
mentioned  this  morning,  is  a financial  one.  That  is  our 
main  problem  today.  Many  of  us  have  been  operating — 
we  have  been  at  an  advantage  in  operating  in  having  long 
term  contracts,  which  are  expiring,  and  which  the  oil  and 
coke  companies  are  trying  to  live  up  to.  Those  are  ex- 
piring, and  they  have  got  to  be  met. 

There  are  additional  points  which  would  be  of  value ; 
that  is,  in  the  matter  of  extensions.  Personally  I am  of 
the  opinion  that  under  the  present  conditions  there  should 
not  be  any  railway  extensions  ordered  in  the  communities 
in  which  we  are  operating,  with  the  present  costs  of  ma- 
terial and  labor.  In  fact,  when  we  start  a project  nowa- 
days we  never  know  whether  it  is  ultimately  going  to  be 
finished.  It  is  impossible  to  get  shale  and  paving  brick; 
it  is  impossible  to  get  sand.  None  of  our  communities 
would  expect  us  to,  because  we  are  serving  the  communi- 
ties along  there  very  well,  indeed.  In  fact,  we  have  very 
little  requests  for  extensions;  none,  in  fact,  except  one 
minor  one,  which  should  be  postponed,  and  which,  we 


352 


trust,  will  be,  but  we  believe  railway  extensions  should  be 
at  least  postponed  until  we  know  whether  or  not  this 
condition  is  going  to  be  permanent.  It  does  not  do  any 
good  to  go  into  the  market  and  bid  for  labor  and  mate- 
rials ; it  does  not  do  any  one  any  good,  it  does  not  do  the 
big  fellow  any  good,  it  just  boosts  the  price. 

Take  the  matter  of  gas  service.  Cast  iron  pipe  in  pre- 
war times  we  bought  for  $23  a ton.  The  last  quotation 
we  had  was,  4-inch  pipe,  $83,  and  3-inch  pipe,  $89.90, 
something  like  that.  So  that  analysis  shows  that  with  ma- 
terial at  that  price  it  is  almost  impossible  to  take  on  addi- 
tional customers  under  existing  regulations.  Those  mat- 
ters, of  course,  are  before  the  commission  at  the  present 
time.  We  have  all  gotten  to  the  point  where  I think  the 
public  has  benefited  very  largely  in  keeping  the  rates  down, 
particularly  the  small  user  of  service,  because  we  have 
been  using  up  our  resources ; most  of  us  have  used  them 
all  up.  It  seems  to  me  absolutely  essential  that  this  in- 
crease and  everything  else  be  reflected  more  nearly  in 
the — on  the  order  of  the  present  purchasing  power  of  the 
dollar.  I believe  that  is  all  I have. 

Commissioner  Shaw:  I believe  you  stated  you  are 
chairman  of  the  Illinois  Electric  Association? 

A.  Yes,  sir. 

Q.  When  the  war  was  actually  on  it  was  represented 
to  the  commission  by  a good  many  companies  operating 
in  this  state  that  they  were  then  running  at  full  capacity, 
or  really  had  an  overload,  that  they  were  unable  to  in- 
crease their  capacity  by  reason  of  the  government  com- 
mandeering the  material  necessary  to  increase  capacity? 

A.  Yes,  sir. 

Q.  Also  by  reason  of  the  scarcity  of  men  and  material 


the  maintenance  was  not  kept  up,  there  was  deferred 
maintenance  I 

A.  Yes,  sir. 

Q.  Now,  taking  the  electric  companies  of  Illinois  as 
a whole,  what  is  the  situation ; are  the  plants  running  at 
very  much  overload;  is  there  deferred  maintenance  as  a 
general  proposition!  Those  are  the  things  we  would  like 
to  have  light  on. 

A^.  I would  say  that  today  the  plants  are  more  over- 
loaded than  they  were  during  war  times,  because  the 
companies  are — there  was  a period  during  the  immediate 
adjustment  period  it  was  impossible  to  get  equipment, 
and  deliveries  have  been  slow  ever  since.  Money  has 
been  almost  impossible  to  obtain.  As  a result  the  exten- 
sions of  the  plants  have  not  been  anywhere  near  normal. 
Now,  as  applied  to  the  company  with  which  I am  directly 
concerned  in  this  state,  we  went  into  the  war  better 
equipped  than  the  average.  In  fact,  it  was  brought  out 
in  the  senatorial  investigation  that  Chicago  and  the  Tri- 
Cities  were  the  only  places  wliere  available  electric  ca- 
pacity could  be  obtained.  As  a result  of  that  the  Rock 
Island  arsenal  increased  its  employes  from  1,200  to 
18,000.  Jn  addition  there  was  a large  Davenport  plant 
employing  some  30  or  35  hundred.  The  Davenport  Man- 
ufacturing Company  was  just  starting  and  altogether 
there  was  some  ten  thousand  kilowatt  of  additional  busi- 
ness brought  to  our  community.  Now,  since  the  conclu- 
sion of  the  war  these  factories  have  gotten  onto  a peace 
basis,  and  their  demand  on  us  is  as  great  as  it  was.  Their 
consumption  has  dropped  because  they  are  not  working 
nights,  not  employing  as  many  men,  and  the  load  factor 
on  the  electric  and  gas  plants  is  not  as  great,  but  answer- 
ing the  question  directly,  I would  say  from  my  general 


354 


\ 


knowledge  of  the  situation — I know  it  is  true  in  our  prop- 
erties— that  there  is  less  reserve  than  there  was  at  that 
time. 

Q.  Directly  to  the  question,  is  there  not  a need  at  this 
time  for  a large  amount  of  funds — I am  speaking  of 
the  state  outside  of  Chicago — for  the  raising  of  funds 
for  the  enlargement  of  the  plants  for  the  purpose 
of  bringing  the  properties  up  so  that  the  proper  re- 
lation exists  between  the  load  and  the  demands  made 
upon  that,  and  the  capacity,  and  also  to  anticipate  future 
demands  made  upon  the  company  f 

A.  Any  figure  I might  make  on  that  would  be  a guess. 
I would  say  in  the  state,  outside  of  Chicago,  there  would 
be  requirements  of  25  millions,  anyway,  immediate  and 
insistent. 

Chairman  Wilkerson:  Does  that  cover  all  important 
utilities? 

Commissioner  Shaw:  My  question  was  directed  to 
electricity.  I didn’t  cover  gas. 

The  Witness : I don’t  think  that  would  cover  them  all. 
As  to  the  matter  of  deferred  maintenance,  I think  that 
applies  with  greater  force  to  street  railways  properties 
than  it  does  to  the  gas  and  electric.  I know  our  railway 
properties  are  not  being  maintained  near  to  the  standard 
we  would  like  to  maintain  them,  because  of  the  fact  it  is 
absolutely  impossible  to  get  men  to.  We  have  got  in  Mo- 
line, East  Moline,  Rock  Island  and  Silvis  a track  force 
of  not  to  exceed  ten  men.  They  can’t  be  obtained.  We 
otfer  them  75  cents  an  hour,  and  the  factories  otfer  them 
a dollar  an  hour.  We  can’t  meet  the  competition.  We 
have  a few  old  men  who  appreciate  steady  employment 
who  stay  with  us.  We  are  getting  on  the  best  we  may. 

Commissioner  Shaw:  You  gave  an  approximate  fig- 


355 


nre  of  the  amount  of  funds  necessary  to  the  electric  prop- 
erties; covering  others,  such  as  water,  heat,  gas  an,d 
street  railways,  have  you  in  mind  any  figure? 

A.  As  a very  rough  approximation  I should  say  that 
the  total  requirements  must  be  on  the  order  of  fifty 
millions  anyway.  I know  we  need  just  in  our  own  little 
group — our  budget  for  this  year  for  our  own  little  group 
on  the  Illinois  side  of  the  river,  is  approximately  one 
million  dollars ; if  that  is  any  criterion  of  the  state,  and 
I believe  it  is. 

Commissioner  Lucey:  That  might  include  Chicago! 

A.  Not  Chicago  proper,  but  I would  include  in  that 
such  companies  as  the  Public  Service  companies  that 
come  around  Chicago. 

Commissioner  Funk:  Do  they  have  the  same  difficul- 
ties in  getting  men  as  you  stated  you  have  to  keep  up 
the  maintenance!  You  stated  it  was  hard  for  you  to  get 
men  enough  to  keep  up  the  tracks ! 

A.  Yes,  Ave  would  have  difficulty  in  making  these  ex- 
tensions. 

Q.  The  difficulties  are  not  all  financial! 

A.  That  is  the  biggest  one. 

Q.  It  might  be  a question  if  you  could  get  the  men 
if  you  got  the  money! 

A.  That  is  the  biggest  difficulty.  It  is  difficult  to  get 
the  workingmen  on  account  of  the  shortage  of  labor.  I 
never  saw  a time  when  conditions  approximated  today. 
Unless  these  conditions  are  met  one  of  two  things  must 
happen;  either  discontinue  additional  business,  in  Rock 
Island,  East  Moline  and  Moline.  If  we  don’t  install  addi- 
tional capacity  we  must  drop  some  very  large  customers, 
because  we  are  exceeding  the  safe  capacity  of  the  plant 


356 


from  the  operating  end.  We  are  proceeding  to  enlarge 
the  plant. 

Chairman  Wilkerson : That  is  all,  Mr.  Denman. 

Mr.  Alschuler:  Do  any  of  the  commissioners  wish  to 
ask  any  questions  of  Mr.  Sawyer?  Have  you  anything 
further  you  desire  to  state  to  the  commission,  Mr. 
Sawyer? 

(Witness  excused.) 


W.  H.  Sawyek,  a witness  on  behalf  of  the  utilities,  re- 
called, resumed  the  stand  for  further  examination  by 

Mr.  Alschuler,  and  testified  as  follows : 

The  Witness:  Just  a word.  Our  conditions  down 
there,  as  I stated,  are  local.  As  to  this  feeling  regarding 
the  commission,  I doubt  whether  there  is  any  one  in  that 
territory  who  questions  the  advisability  of  a regulatory 
body  such  as  this  commission.  I donT  think  there  is  any- 
body in  that  territory  who  believes  that  the  commission 
has  unduly  favored  the  companies.  In  this  view  I con- 
cur. With  no  other  spirit  than  a desire  to  get  some  help 
I feel  we  need,  there  is  one  point  locally  that  I feel  that 
the  commission  in  the  past,  if  they  had  sufficient  help, 
hadn  T so  much  work  to  do,  could  have  helped  us ; that  is 
more  haste.  We  have  had  to  wait  too  long  when  that 
condition  was  too  serious,  and  to  a large  extent  we  had 
had  to  rely  upon  past  records.  In  other  words,  we  have 
got  into  this  bad  condition  in  order  to  prove  our  case.  We 
must  get  the  rates  I feel  we  are  entitled  to  because  in  the 
end  the  people  have  got  to  pay  the  price.  We  can  keep 
that  price  over  a term  of  years  in  better  shape  if  we  can 
have  more  prompt  help.  I didnT  answer  the  question 
this  morning  in  regard  to  the  rate  of  return.  I should 


357 


like  to  state  in  my  opinion  these  companies  must  be  al- 
lowed to  earn  as  a minimum  12  per  cent.  I mean  just 
what  I said,  ^‘allowed  to  earn.’’  That  is  not  necessarily 
the  cost  of  money,  but  taking  that  and  everything  into 
consideration.  I believe  on  this  question  of  valuation  that 
we  should  be  put  upon  the  same  basis  as  other  indus- 
tries are  put  as  to  what  they  are  worth,  put  the 
same  kind  of  a measuring  stick  on  it  in  so  far  as  prac- 
ticable, come  at  this  from  a fearless  standpoint.  The 
people,  I believe,  down  our  way  are  ready  to  follow  with 
the  commission.  They  have  faith  in  you,  they  believe  in 
you.  If  you  tell  them  that  we  need  this  money  down 
there  today,  they  will  believe  you,  follow  with  you.  If 
you  feel  that  we  need  it,  I will  say 

Commissioner  Lucey:  Do  you  think  12  per  cent  will 
put  you  on  about  a fair  basis  with  the  ordinary  industry? 

A.  In  our  local  case,  I am  trying  to  be  fair  there,  that 
is  the  least  I can  say.  We  don’t  care  how  you  figure  it, 
whether  it  is  9 per  cent  actual  cost  of  the  money,  plus  3 — 
there  should  be  a contingent  reserve  in  order  to  establish 
confidence. 

Q.  Twelve  per  cent  would  be  to  cover  depreciation  as 
well  as  return? 

A.  No,  sir. 

Q.  What  have  you  in  mind  that  you  ought  to  be 
allowed  to  earn  for  rate  of  return  and  for  maintenance 
and  depreciation? 

A.  From  my  experience  there  is  no  possibility  of  ob- 
taining money  at  less  than  nine  per  cent,  actual  cost  to 
the  company.  There  should  be  a contingent  reserve 
allowed  to  make  over  and  above  that  to  preserve  the 
equality  so  that  he  may  keep  his  cost  of  money  at  nine 
per  cent.  In  speaking  of  depreciation  I don’t  believe 


358 


we  should  grab  a per  cent  out  of  the  air.  It  varies  in 
different  companies,  according  to  the  kind  of  the  com- 
pany. If  you  have  a power  house  with  long  life  that 
changes  the  basis. 

Q.  Would  you  say  three  per  cent  was  a fair  average! 

A.  No,  sir;  I would  not.  In  our  railway  case  Mr. 
Hagenah  gave  us  it  in  a sum  of  money  approximating 
four  per  cent.  However,  after  he  was  on  the  stand  he 
said  to  us:  ^‘I  am  conservative,  it  is  too  low.” 

Q.  They  should  earn  16  per  cent  at  least! 

A.  Yes,  sir. 

Commissioner  Funk:  You  say  the  cost  of  money  is 
nine  per  cent.  That  is  only  for  the  amount  of  money 
they  need  at  this  time.  You  are  not  saying  the  commis- 
sion should  put  a high  rate  to  cover  nine  per  cent  on  the 
money  already  had  at  a low  rate! 

A.  They  are  maturing  all  the  time. 

A.  As  these  mature — most  of  the  companies  have  long 
term  obligations at  the  Chicago  hearing  the  sugges- 

tion was  made  in  every  case  they  should  have  14  to  16  per 
cent  on  the  theory  those  unmatured  securities  were  ma- 
turing. Certainly  it  should  not  be  suggested  that  this 
commission  establish  a schedule  of  rates  for  nine  per 
cent  on  money  in  the  property  ten  or  fifteen  years.  That 
is  what  I thought  you  stated. 

A.  I think  you  understood  correctly. 

Q.  Suppose  your  bonds  had  fifty  years  to  run,  or 
twenty  years — A.  We  haven’t  any  such  thing. 

Q.  And  your  theory  is  when  these  things  mature  the 
scheme  of  rates  should  be  such  as  to  allow  a return  on 
the  money  borrowed  at  the  market  rates  now,  plus  your 
operating  expenses,  and  a reasonably  liberal  allowance 


359 


for  maintenance.  It  seems  absurd  to  talk  about  a rate  of 
return  to  take  care  of  the  obligations  outstanding  and 
unmatured,  some  running  twenty  or  thirty  years.  I think 
we  should  talk  facts  and  we  would  get  closer  together 
and  understand  each  other  better. 

A.  If  on  the  showing  of  the  bonds,  on  the  value  of  the 
bonds  and  stocks  you  are  making  only  six  per  cent  for 
return,  you  can^t  induce  some  other  man  to  put  new 
money  into  that  property.  Now  what  is  the  dividing  line 
I don’t  know,  but  the  measuring  stick  has  got  to  be,  what 
have  you  earned  in  the  past,  what  are  you  earning  today, 
and  what  are  the  probabilities  as  to  what  you  will  earn 
tomorrow  in  ^mur  whole  property!  That  is  what  the  in- 
vestor is  going  to  look  at. 

Commissioner  Lucey:  Do  you  think  the  cost  of  money 
should  be  the  final  test! 

A.  No,  sir;  it  is  not  the  final  test,  but  we  should  be 
allowed  enough  money  that  new  money  should  readily 
flow  in.  We  should  not  be  allowed  any  more. 

Chairman  Wilkerson:  Don’t  you  get  involved  in  a 
little  confusion  when  you  give  any  consideration  to  out- 
standing stocks  and  bonds  in  speaking  of  a rate  of  re- 
turn! What  you  are  entitled  to  under  the  law  is  a fair 
return  on  the  fair  value  of  your  property.  It  is  immate- 
rial how  much  stock  you  have  outstanding,  it  is  immate- 
rial how  many  bonds  you  have  oustanding.  What  the  law 
gives  is  a fair  return  on  the  fair  value  of  the  property. 
Of  course,  if  the  company  is  bonded  for  more  than  you 
can  stand,  that  is  not  a remedy  before  this  commission 

A.  Yes,  sir. 

Q.  If  I understand  your  testimony,  it  is  your  position 


360 


if  you  are  granted  a fair  rate  of  return,  by  a fair  rate 
of  return  you  mean  a return  which  is  comparable  with  the 
returns  which  come  to  capital  otherwise  invested  in  your 
community,  if  you  are  granted  fair  rates  of  return  upon 
a fair  value  you  will  be  able  to  do  the  things  you  have 
outlined  ? 

A.  Yes,  sir,  which  we  want  to  do  and  which  the  com- 
munities want  us  to  do. 

Commissioner  Lucey : In  comparing  yourself  with  the 
industrials,  who  have  many  difficulties  which  you  don^t 
have,  of  other  kinds  than  yours,  don’t  you  think  there 
'Should  be  taken  into  account  the  practical  monopoly  that 
your  company  enjoys  in  that  field,  the  practical  security 
of  the  permanency  of  the  business,  and  the  probably 
certainty  that  there  will  be  a fair  rate  of  return  which 
must  come  under  this  method  and  which  could  not  be 
kept  from  you  by  anybody  so  disposed;  that  should  be 
taken  into  consideration,  shouldn’t  it,  and  some  allow- 
ance made  for  that,  as  compared  with  a manufacturing 
business,  retail  trade  or  wholesale  trade,  or  anything 
else  of  that  kind?  A.  I think  as  of  today  that  is  a 
liability  and  not  an  asset  to  the  company. 

Q.  You  do? 

Chairman  Wilkerson:  The  fact  you  are  subject  to 
regulation?  A.  The  fact  we  are  subject  to  regulation? 
Not  the  term — that  term  ‘^subject  to  regulation” — I be- 
lieve we  should  be  subject  to  regulation;  the  people  be- 
lieve we  should  be  subject  to  regulation. 

Q.  Do  you  think  that  works  against  you  on  marketing 
securities?  A.  I think  the  times. have  been  so  abnormal 
nobody  can  keep  up  with  them.  We  have  got  to  the  point 
where  we  have  got  to  have  more  to  keep  step  with  busi- 
ness properties.  Helying  on  the  past  records  of  these 


361 


utilities  you  will  get  what  appears  to  be  an  abnormal 
return,  but  it  is  necessary  to  get  confidence  back  and  you 
must  get  confidence  back  before  you  can  attract  the 
amount  of  money  which  is  necessary.  I believe  the  day 
will  come  when  the  regulated  monopoly  will  be  looked 
upon  with  favor,  when  they  can  go  into  the  money  market 
with  lower  rates  of  return  than  industries  subject  to 
hazard. 

Q.  That  was  pointed  out  in  a number  of  cases.  In 
the  Wilcox  case  in  the  United  States  supreme  court  it  was 
pointed  out  that  one  of  the  elements  to  be  considered  was 
the  fact  in  time  of  financial  depression,  business  panic, 
general  disorder,  an  utility  had  its  return  in  a measure 
protected  by  its  legal  right  to  receive  a fair  return  on  a 
fair  value  of  its  property.  So  if  you  look  far  enough 
ahead  we  will  have  periods  of  depression.  The  fact  is 
that  the  law  when  it  gives  a fair  return  upon  the  fair 
value  of  your  property  did  something  which  would  make 
a security  of  that  kind  appeal  to  the  investors. 

A.  It  should  be  and  in  the  end  it  will  be. 

Q.  Even  if  the  rate  of  return  is  somewhat  lower  than 
you  will  get  in  undustrial  enterprises,  which  in  times  of 
depression  and  panic  he  might  not  only  lose  his  return 
but  lose  his  capital? 

A.  Yes,  sir. 

Commissioner  Lucey:  In  answer  to  my  question  you 
said  regulation  was  a liability  and  not  an  asset,  didn’t 
you? 

A.  Excuse  me,  Mr.  Commissioner,  I didn’t  mean  to 
say  that.  I don’t  like  that  phraseology,  ^‘regulation”. 
In  our  situation  of  today  as  compared  with  industrials, 
not  regulation,  but  the  fact  that  we  are  a monopoly,  oper- 


362 


ating  under  the  conditions  we  have,  is  and  has  been  a lia- 
bility. 

Chairman  Wilkerson : You  mean  your  investor  is  not 
looking  a good  many  years  ahead! 

A.  I believe  that  we  are  in  the  safest  and  soundest 
business  there  is. 

Q.  He  is  looking  at  the  immediate  future! 

A.  He  is  sore;  he  has  lost  confidence. 

Commissioner  Lucey:  You  are  getting  off  the  track. 
I asked  you  a certain  question.  You  said  you  thought 
liability  was — that  regulation,  rather,  was  a liability  in- 
stead of  an  asset.  What  I am  trying  to  get  at,  I don’t 
think  you  have  elucidated  it,  I was  wondering  if  you 
meant  as  far  as  the  utility  itself  was  concerned  it  would 
get  along  better  without  the  regulation,  or  get  along 
better  with  the  regulation  it  had  before  the  state  regula- 
tion, or  whether  that  remark  you  made  refers  to  some- 
body else’s  thought  about  it. 

A.  I believe  in  regulation.  I believe  we  are  better  off 
to  be  regulated  as  a monopoly.  We  would  have  no  meas- 
uring stick  to  compare  with  ourselves  unless  we  had  some- 
thing like  yourselves.  We  would  not  be  satisfied,  the 
people  would  not  be  satisfied,  unless  we  were  regulated. 

Q.  Of  course,  you  were  always  regulated  by  the 
municipalities!  A.  Yes,  sir;  before  that,  about  twenty 
years  ago  we  were  regulated  by  competition.  I believe 
we  are  operating  under  the  correct  methods  today.  I 
believe  the  conditions  are  such,  today,  not  only  in  the 
state  of  Illinois,  but  elsewhere,  that  the  conditions  under 
which  we  have  to  operate,  and  with  our  financial  condi- 
tion, it  is  a liability  instead  of  an  asset,  as  compared 
with  industrials. 


363 


Q.  In  that  sense  it  is  a liability,  as  compared  ^with 
industrials,  in  that  it  can’t  fix  its  prices  in  accordance 
with  the  cost  of  operation  and  the  cost  of  production. 
I was  wondering  what  you  meant  when  you  said  regula- 
tion was  more  of  a liability  than  it  was  an  asset.  Of 
course,  you  have  always  had  regulation,  either  through 
the  municipalities  attempting  to  regulate  you,  or  you 
regulating  the  municipalities,  I don’t  know  which,  but  it 
had  an  effect  of  that  kind. 

A.  State  regulation  has  helped  us  in  some  places 
so  far  as  getting  advanced  rates  goes. 

Q.  I don’t  care  so  much  about  your  getting  advanced 
rates  as  I do  the  opportunity  which  you  have  to  present 
your  necessities  and  secure  the  relief  in  accordance  with 
what  you  claim  you  are  entitled  to.  You  haven’t  been 
able  to  get  that  in  Illinois  to  the  extent  you  think  you 
might  have,  but  you  have  this  consolation  to  otfer  to  the 
stockholders,  to  the  holders  of  the  bonds,  wherever  he 
may  be,  whether  in  New  York,  San  Francisco  or  New 
Orleans,  that  there  was  a state  regulatory  body  which 
would  see  that  you  got  a rate  of  return  which  would  be 
a fair  return  upon  the  value  of  your  property,  plus  the 
cost  of  operations  and  the  depreciation,  and  a legitimate 
cost  of  doing  business.  At  least  you  could  hold  that  out 
to  the  gentleman  who  was  carrying  your  bonds,  whether 
you  are  paying  his  interest — 

A.  I can’t  offer  any  inducement  to  those  people.  If 
you  are  not  paying  the  interest  you  can’t  do  much  talk- 
ing. 

Q.  Whose  fault  do  you  think  that  is! 

A.  I suppose  I am  partially  to  blame.  I have  offered  to 
step  out.  They  don’t  see  it  that  way.  They  say,  as  long  as 
you  are  willing  to  stick  on  the  job,  we  will  keep  you 


364 


there.  I have  many  letters  asking  me,  ^^what  is  the 
matter  with  the  Illinois  commission,  when  are  you  going 
to  do  this,  when  are  you  going  to  do  that  T ’ I have  told 
them  we  are  going  ahead  and  working  along  those  lines. 
Eventually  things  are  going  to  be  a great  deal  better. 
I haven’t  lost  faith  in  human  nature  or  in  anybody  else. 

Q.  Of  course,  the  Illinois  commission  does  not  stand 
to  guarantee  any  rate  of  return  on  any  certain  amount  of 
your  stocks  and  bonds. 

A.  No,  sir ; I have  never  been  here  before  on  the  stocks 
and  bonds. 

Q.  All  the  law  provides  is  you  shall  have  a fair  rate 
of  return  on  the  fair  value  of  your  property.  If  you 
haven’t  got  that  I want  to  accept  some  share  of  the  re- 
sponsibility. If  you  have  got  what  the  commission  thinks 
is  a fair  rate  of  return  on  a fair  value  of  the  property, 
and  you  are  still  not  paying  interest  on  the  bonds,  then 
I think  that  the  fault  is  on  the  other  side  of  the  table. 

A.  I think  we  have  got  to  bear  it  all  between  us  a 
little  bit. 

Q.  I w^ouldn’t  carry  much  of  that. 

A.  You  take  the  Alton  properties.  The  Alton,  G-ran- 
ite  and  St.  Louis  Traction  Company  was  appraised  at 
something  over  $3,100,000,  by  the  commission’s  engineers, 
testified  to  as  a minimum  valuation.  They  bluntly  stated 
that  the  original  cost  was  in  excess  of  that.  Our  bond 
issue  is  under  that  valuation,  and  we  are  not  paying  the 
bond  interest.  It  is  possible  that  more  efficient  methods 
might  have  been  employed  here  and  there — the  exact 

amount  is  beyond  every  one  of  us if  we  had  had  on 

the  city  lines  of  the  company  in  Alton  more  prompt  re- 


365 


lief  there,  which  would  not  exceed  a fair  return  on  the 
fair  value,  it  would  have  helped  that  situation. 

Q.  What  do  you  get  there  now? 

A.  Eight  cents,  down  to  a seven-cent  ticket  fare,  an 
average  of  cents;  ought  to  have  had  it  a year  ago. 
That  is  what  I mean.  With  no  spirit  of  meanness,  if  you 
could  have  helped  in  the  question  of  haste,  it  would  have 
helped  us.  As  to  the  question  of  valuation.  No  question 
of  valuation  entered  into  that.  We  stated  we  accepted 
it  for  the  purpose  of  this  rate.  There  was  no  showing 
we  were  making  over  six  per  cent  on  that.  We  wanted 
it  and  we  needed  it. 

Q.  Well,  I don’t  know  just  what  the  situation  may 
be  relative  to  the  incident  you  cite.  I have  very  distinct 
recollection  one  morning  when  two  very  estimable  gentle- 
men from  a neighboring  city  came  here  on  a water  rate, 
and  they  indulged  in  a quarrel  whether  the  continuance 
should  be  for  one  week  or  two.  That  was  about  two 
months  ago,  and  the  counsel  representing  the  utility 
wanted  two  weeks  continuation,  and  the  corporation  coun- 
sel insisted  he  would  not  stand  for  more  than  a week. 
They  have  been  a dozen  times  and  that  case  has  not  yet 
been  presented  to  the  commission,  not  through  any  fault 
of  the  commission,  but  through  the  fault  of  themselves. 
It  is  still  an  open  and  pending  question.  There  are  many 
of  those  instances  that  might  be  cited.  I am  not  finding 
fault  with  this  Alton  situation.  Perhaps  we  do  err  once 
in  a while  on  the  side  of  being  careful,  but  there  are  many 
things  the  commission  must  take  into  consideration.  As 
Mr.  Bloom  suggested,  under  the  Ohio  law  you  have 
the  right  to  file  your  rate  and  to  have  them  become  ef- 
fective, right  away.  You  can’t  do  that  here. 

A.  I might  clear  up  one  thing.  I am  up  around  here 


366 


a good  deal,  and  I see  considerable  of  your  assistants. 
I don^t  know  of  anybody  approaching  the  amount  of  work 
that  is  done  by  utility  engineers  every  day  any  more 
than  the  commission’s  engineers.  I brought  it  out  with- 
out any  meanness,  as  something  which  can’t  be  over- 
come. Your  men  have  stacks  of  work  around  them  all 
the  time. 

Q.  Don’t  misunderstand  me.  I am  not  finding  fault 
with  any  criticism. 

Chairman  Wilkerson:  That  is  because  the  legislature 
misconceived  the  work  of  this  commission  and  gave  us 
$100,000  to  do  the  work  that  other  states  gave  one-half 
to  a million  dollars  for. 

Commissioner  Lucey:  I might  enlarge  on  the  chair- 
man’s remarks.  They  gave  us  $100,000  after  he  made 
a protest.  They  gave  us  $2,000  to  start  with. 

Commissioner  Funk:  I think  it  ought  to  be  clearly 
understood,  Mr.  Sawyer — ^you  say  that  one  of  the  diffi- 
culties in  getting  money  for  these  utilities  is  because 
oftentimes  they  are  not  able  to  earn  twice  their  interest 
charges.  I presume  that  is  good  business  upon  the  part 
of  the  bankers,  and  so  forth,  but  that  is  not  a factor  that 
correlates  with  what  we  are  charged  under  the  law,  so 
we  even  couldn’t  allow  a rate  which  would  permit  an 
utility  to  earn  twice  its  interest  charge.  As  everyone 
knows,  our  duty  is  to  try  and  ascertain  a rate  which  will 
bring  a fair  return  upon  the  value  of  the  property,  which 
may  be  a separate  and  distinct  thing  from  the  bonded 
indebtedness,  so  the  company’s  difficulty  in  some  instance 
in  securing  money  is  not  always  chargeable  to  the  com- 
mission. 

A.  It  certainly  wouldn’t  be  if  the  bonded  indebted- 
ness is  in  excess  of  fair  value. 


367 


Chairman  Wilkerson:  Mr.  Alschuler,  one  of  the  im- 
portant things  which  we  desired  to  gather  at  this  hearing 
was  specific  information  as  to  the  needs  of  these  utilities 
in  the  way  of  enlargements  and  extensions  to  take  care 
of  the  public  demands  of  the  immediate  future.  In  other 
words,  what  is  the  minimum  amount  of  work  or  enlarge- 
ments and  extensions  which  can  be  done  under  these  ab- 
normal conditions  so  as  to  make  anything  like  reason- 
able provisions  for  the  demands  of  the  future.  If  we 
have  another  hearing  tAvo  weeks  from  today,  it  would  be 
a help  to  the  commission  if  you  would  have  filed  some 
specific  information  in  addition  to  what  you  have  had  in 
the  general  statements. 

Mr.  Alschuler  : I Avill  say  we  have  prepared  a ques- 
tionnaire along  that  line  and  sent  it  to  the  companies 
throughout  the  state.  We  knew  it  was  impossible  to  get 
the  information  for  this  hearing,  but  we  are  hopeful  of 
getting  it  in  before  another  hearing. 

Chairman  Wilkerson : I am  glad  you  are  doing  that. 

Mr.  Alschuler:  It  appears  that  about  all  Ave  could  do, 
the  companies  being  from  all  parts  of  the  states,  was  to 
ask  the  operators  to  come  down  here  and  make  general 
statements.  When  Ave  are  through  some  of  us  who  are 
here  today  are  going  to  try  and  get  together  and  map 
out  a program  to  get  that  definite  information  for  the 
commission,  although  some  of  us  have  already  started  to 
work  preparing  that  questionnaire. 

Commissioner  Shaw:  This  might  be  a help  also,  Mr. 
Alschuler,  if  the  commission  knew  the  needs,  Avhich  would 
be  the  needs  embodied  in  the  chairman’s  question,  in  the 
next  two  years,  by  years;  then  your  demands  for  re- 
financing for  the  next  two  years,  by  years. 

Mr.  Alschuler : We  will  be  very  glad  to  compile  all  that 
data. 


368 


Commissioner  Funk:  What  the  rates  are  on  those 
issues  that  are  expiring  or  about  to  expire,  and  that  rate 
contrasted  witli  what  the  probable  new  rate  will  be  for 
the  refunding  money. 

Mr.  Alschuler:  We  will  be  glad  to  have  that  informa- 
tion compiled.  We  have  one  more  operator  here,  and 
that  will  be  all  we  have.  That  is  all  with  Mr.  Sawyer. 

Chairman  Wilkerson:  Proceed. 

(Witness  excused.) 


Mahshaul.  E.  SAMPSELi,,  called  as  a witness  on  behalf 
of  the  utilities,  having  been  first  duly  sworn,  was  ex- 
amined in  chief  by  Mr.  Alschuler,  and  testified  as  fol- 
lows : 

Q.  State  your  name,  residence  and  your  business  ex- 
perience? 

A.  Marshall  E.  Sampsell,  I am  president  of  the 
Central  Illinois  Public  Service  Company,  and  five  sub- 
sidiary companies  of  that  company;  president  of  the 
Eastern  lUinois  Utility  Company,  also  an  Illinois  cor- 
poration; president  of  seven  public  utility  corporations 
in  the  state  of  Wisconsin ; and  president  of  one  gas  com- 
pany in  Iowa,  and  one  unfortunate  railway  company 
in  the  city  of  Seattle.  I have  been  president  of  the  Cen- 
tral Illinois  Public  Service  Company  since  1910. 

Q.  Mr.  Sampsell,  you  have  had  submitted  to  you  this 
question  which  has  been  answered  by  the  other  witnesses, 
have  you  not? 

A.  I have ; yes,  sir. 

Q.  Will  you  proceed  to  answer  the  question? 

A.  So  far  as  the  question  relates  to  the  Central  Illi- 


nois  Public  Service  Company,  if  the  Commission  please,  I 
think  it  well  to  point  out  at  the  outset  that  the  Central  Illi- 
nois Public  SerAuce  Company  has  been  going  through  a de- 
velopment period  during  this  whole  time  which  has  been 
discussed  in  Chicago  and  at  the  hearing  today.  In  other 
words,  in  1912  the  Central  Illinois  Service'  Company 
operated  in  13  communities  in  Illinois,  and  had  an  an- 
nual gross  income  of  approximately  $155,000.  Today 
that  company  operates  in  181  communities  in  the  state  of 
Illinois,  and  had  at  the  end  of  the  year  last  past,  1919, 
a gross  income  of  four  million,  a hundred  and  sixty-seven 
thousand  dollars. 

I outline  this  so  as  to  show  that,  of  course,  such  a 
growth,  such  a development,  which  has  been  made 
possible  by  the  expenditure  of  great  amounts  of  money, 
has  been  made  during  this  time  with  the  greatest  diffi- 
culty, but,  having  undertaken  it,  it  was  necessary  that  the 
development  be  carried  through,  for  the  reason  that  the 
whole  situation  redounded,  as  it  must  always  redound, 
to  the  benefit  of  the  communities  served  by  this  com- 
pany, as  well  as  to  the  large  loads  which  the  company 
also  serves — such  loads  as  some  sixty  thousand  acres  of 
drainage  land  along  the  Illinois  River,  and  thirty-nine 
distinct  coal  mines,  which  bring  to  the  surface  annually 
approximately  eight  million  tons  of  coal ; and  other  large 
industries  that  lie  without  the  city  limits  of  certain  of 
these  communities. 

It  is  our  belief  that  if  a public  utility  fails  to  function 
properly,  then  chaos  must  follow  in  so  far  as  the- -in  so 
far  as  every  industry  served  by  that  utility  is 
concerned,  in  so  far  as  other  public  entities  are  con- 
cerned, such  as  the  municipalities  themselves,  and 
in  so  far  as  the  business  and  social  life  of  the  terri- 


370 


tory  served  by  that  utility  are  concerned,  and  it  is  there- 
fore necessary  in  times  such  as  have  confronted  utility 
companies,  not  only  in  Illinois,  hut  throughout  the  United 
States,  both  during  and  since  the  war,  that  relief  be 
given  to  those  utilities  as  early  after  it  is  apparent  re- 
lief is  necessary  as  possible. 

Now,  in  listening  to  the  discussion,  it  strikes  me  it 
should  be  emphasized  that  one  of  the  things  which  has 
tended  to  make  the  investors  in  public  utilities  suspicious 
of  the  future  intrinsic  value  of  those  securities  is  the 
fact  that  these  utilities  have  had  to  suffer  a certain  delay 
in  the  matter  of  securing  relief.  Much  of  this  delay,  it 
may  be  conceded,  has  been  necessary,  but  nevertheless,  in- 
vestors have  been  unable  to  understand  the  reasons  there- 
for. So  they  feel,  if  a public  utility  must  go  through 
cycles  such  as  we  have  gone  through,  imposing  a tardiness 
in  getting  relief,  to  the  end  that  securities  fall  as  to  their 
value,  so  far  as  the  ability  to  sell  the  same  is  concerned, 
everything  being  equal  they  had  better  put  their  funds  in 
other  directions,  such  as  industries.  Now,  I feel  it  is  due 
this  commission ; it  is  due  the  public ; it  is  due  the  com- 
panies represented  here,  and  the  companies  throughout 
the  state,  that  just  consideration  be  given  to  the  facts 
which  have  confronted  the  commission,  to  the  facts 
that  have  confronted  the  companies,  and  to  the  facts  that 
the  public  have  had  to  be  confronted  with,  before  any 
wholesale  criticism  is  made,  either  against  the  commis- 
sion or  against  the  public  as  a whole  in  objecting  to  rates, 
or  against  the  companies  for  seeking  these  rates.  It  has 
been  pointed  out  that  when  it  was  apparent  the  com- 
panies must  have  help  or  sink,  many  of  them  came  to 
this  commission  with  applications  that  were  prepared 
necessarily  very  hastily,  and  each  company,  of  course, 
considered  that  its  particular  case  was  the  one  that  should 


371 


be  decided  right  off  the  bat,  and  that  it  should  have 
the  relief  sought  in  its  application.  I plead  guilty  to  that 
attitude.  I think  it  is  a proper  attitude,  because  the  men 
responsible  for  these  utilities  realized  keenly  the  direc- 
tion in  which  they  were  drifting,  and  they  knew  that, 
unless  they  got  that  measure  of  relief,  to  which  they  hon- 
estly believed  their  companies  were  justly  entitled,  these 
utilities  would  be  unable  to  properly  function  for  any 
length  of  time.  In  our  case,  we  never  came  in  until  about 
June,  1918,  although  the  war  broke  out,  as  you  know,  in 
1914,  and  this  country  entered  the  war  prior  to  the  time  I 
have  mentioned.  We  came  to  this  commission  for  relief, 
and  we  didnl  ask  for  enough.  We  asked  for  all  we 
thought  we  could  get,  because  we  were  not  unaware  of 
what  we  thought  was  the  general  attitude  of  this  commis- 
sion with  regard  to  the  question  of  the  valuation  of  the 
properties  of  the  utilities,  the  general  attitude  of  the  com- 
mission with  respect  to  the  rates  of  return  which  has  been 
discussed,  and  the  general  attitude  of  the  commission 
with  regard  to  all  the  other  essentials  that  enter  into 
rate  situations.  I say,  we  did  not  ask  for  enough, 
but  we  got  what  we  asked  for,  and  we  got  it  with  rea- 
sonable promptness  ; I should  say,  very  promptly. 

Commissioner  Shaw : About  thirty  days  1 

A.  Yes,  sir;  and  we  were  exceedingly  pleased  that 
we  did  get  it  so  promptly.  I think  I can  speak  from  ex- 
perience as  to  that,  because  the  Central  Illinois  Public 
Service  Company  for  a long  while  has  been  on  almost 
every  call  of  this  commission’s  calendar,  and  has  had, 
so  far  as  the  company’s  general  routine  commission  mat- 
ters are  concerned,  the  kind  of  treatment  that  brings  con- 
fidence. 

Now,  then,  the  order  of  the  commission  in  that  rate 


372 


case  held,  as  the  commission  had  to,  a string  on  the  ulti- 
mate outcome  of  tlie  company's  rate  case.  As  time  went 
on  evidence  was  presented  by  the  company,  and  other 
facts  and  figures  were  given  than  those  that  were  imme- 
diately presented  when  the  original  order  was  asked  for. 
In  turn  the  commission,  through  its  agency,  the  engineer- 
ing department,  presented  a valuation  of  unit  prices  of 
the  units  presented  in  our  appraisal,  and  presented  in 
the  record  exhibits  made  up  independently  of  our 
company.  I want  to  say,  gentlemen  of  this  com- 
mission, frankly  and  honestly,  because  I think  that 
is  what  we  are  here  for,  that  after  studying  the  testimony 
of  your  engineers,  and  after  getting  my  mind  fixed  as 
well  as  I was  able  on  what  I thought  was  the  general 
tendency  of  this  commission  with  regard  to  rates  and  rate 
making,  I was  gun  shy  on  what  the  opinion  and  the 
final  order  would  be  in  that  case,  and  I set  about  to  effect 
a compromise  with  a committee  of  attorneys  represent- 
ing the  148  towns  then  served  by  us. 

Commissioner  Lucey:  As  I remember,  you  got  15 
per  cent  increase?  A.  Yes,  sir. 

Q.  Pending  final  order  of  the  commission  you  entered 
into  a stipulation  with  counsel  representing  the  148  towns 
whereby  you  reduced  that  amount  to  7^  per  cent?  A. 
I reduced  it  in  some  respects. 

Q.  Then  you  asked  that  the  commission  undo  what  you 
stipulated  to  do  in  the  case  at  the  time  it  was  pending? 
A.  You  are  quite  right.  I also  agreed  with  those  gentle- 
men to  ask  this  commission,  and  the  record  shows  I did 
ask  it,  to  permit  us  to  reduce  our  commercial  rates  7^ 
per  cent. 

Commissioner  Shaw:  I might  state,  Mr.  Sampsell,  one 
reason  why  the  municipalities  settled  with  you  is  that  the 
municipalities  were  gun  shy. 


373 


A.  I might  say  that  the  communities  had  a feeling  of 
more  gravity  than  with  regard  to  what  would  be  done, 
because  there  was  a great  discrepancy  between  the  fig- 
ures presented  by  us  and  those  prepared  and  presented 
by  the  Commission’s  engineers — we  put  in  operating 
figures  and  a forecast  of  the  year  to  come, 
based  on  what  our  actual  experience  showed.  Your 
agents  put  in  operating  figures  whereby  they  would  un- 
dertake to  operate  this  property  for  the  same  period,  one 
year,  at  something  like  $200,000  less  money,  although 
during  all  the  time  these  hearings  were  going  on  in- 
creases were  coming  in  leaps  and  bounds.  I stated  I was 
gun  shy,  and  I believe  Commissioner  Shaw  correctly 
states  the  attitude  of  the  counsel  for  the  municipalities 
and,  if  that  reflected  their  clients’  belief,  they  were  also 
probably  gun  shy. 

Commissioner  Lucey:  That  is  usually  what  results 
in  stipulations!  A.  That  is  true. 

Chairman  Wilkerson : In  other  words,  both  sides  were 
afraid  the  commission  would  follow  the  law;  isn’t  that  it! 

A.  No,  sir;  I was  afraid  that  the  commission  would 
stick  too  closely  to  the  well  beaten  path  of  the  Interstate 
Commerce  Commission.  That  was  the  path  of  most  of 
the  state  commissions  in  reaching  their  findings,  merely 
findings  covering  the  property  that  was  easily  apparent, 
and  not  on  the  basis  of  what  was  contended  at  the  com- 
pany’s rate  hearing,  or  what  I contend  should  always  be 
allowed,  namely;  rates  permitted  on  what  are  known  as 
hidden  values,  values  of  property  not  easily  ascertain- 
able. In  other  words,  our  companies  were  all  the  time 
right  against  the  buzz  saw  and  we  knew  the  tremendous 
increases  in  operating  costs  that  were  going  on.  It  was 
not  possible  for  this  commission  to  clearly  understand 
our  serious  situation — you  were  not  operating  the  prop- 


374 


erties,  but  you  are  charged  with  a responsibility  almost 
as  great  as  those  who  operate  the  properties.  Neverthe- 
less, I felt  that  this  commission  (and  I don’t  disbelieve 
in  the  commission,  I am  trying  to  impress  that  on  you), 
I felt  that  this  commission  would  fail  to  see  the  actual 
condition  of  the  company,  and  would  fail  to  exercise  that 
liberality  and  broad  policy  which  I think  they  ought  to 
exercise,  and  therefore  I felt  the  company  might  fail 
to  get  the  relief  to  which  it  was  entitled.  Furthermore, 
it  was  in  your  minds  that  because  the  armistice  was  then 
signed,  the  war  was  over;  I knew  while  the  war  was  over 
the  emergencies  were  still  on,  and  that  instead  of  experi- 
encing falling  prices  we  were  undergoing  steady  in- 
creases in  every  direction. 

Chairman  Wilkerson:  You  thought  that? 

A.  I knew  it;  I thought  it. 

Q.  There  were  many  that  thought  when  the  war  was 
over,  the  war  was  over  ? 

A.  I was  afraid  that  the  commission  would  think  so. 
Now,  as  to  the  company’s  necessities.  The  company  has 
spent  since  1912  between  10  and  11  millions  of  dollars, 
and  that  does  not  include  one  dollar  spent  for  the  acqui- 
sition of  any  properties. 

Chairman  Wilkerson:  We  will  take  a recess  for  five 
minutes. 

(Short  recess  taken.) 

Chairman  Wilkerson : You  may  proceed 

The  Witness : At  the  recess  I stated  that  the  Central 
Illinois  Public  Service  Company  between  the  year  1912 
and  the  present  time  has  spent  ten  and  a half  millions  of 
dollars,  roughly,  on  its  properties,  and  not  one  dollar  of 
this  expenditure  was  included  in  acquisition  of  new  com- 
panies, so  that  that  money  has  all  gone  into  the  physical 
property  making  up  the  company’s  entire  system. 


375 


Commissioner  Lucey.  What  do  you  mean  by  the  ex- 
penditure of  ten  and  a half  million  without  acquiring  new 
property? 

A.  The  Central  Illinois  Public  Service  Company,  for 
instance,  bought  in  1912  63  public  utility  properties,  gas, 
electrio  light,  ice,  and  so  forth,  in  63  towns  in  the  state 
of  Illinois,  and  conveyed  their  physical  property  to  the 
Central  Illinois  Public  Service  Company,  keeping  alive 
such  of  the  underlying  companies  that  had  to  be  kept 
alive  because  there  were  underlying  bonds  out,  assumed 
by  the  Central  Illinois  Public  Service  Company. 

Chairman  Wilkerson:  You  took  the  property,  how- 
ever? 

A.  We  took  the  property,  and  that  property  was  not 
a part  of  the  property  that  was  created  by  the  $10,500,- 
000 ; in  other  words,  the  work  orders  of  the  company  evi- 
dence these  expenditures.  It  is  not  a question  of  how 
much  capital,  either  in  bonds  or  stocks,  is  set  up  on  the 
books  during  this  period. 

Now,  as  to  that  part  of  the  inquiry,  Mr.  Alschuler, 
which  goes  to  the  question  of  the  company’s  future  ex- 
tensions and  enlargements,  it  is  my  most  conservative 
judgment  that  the  Central  Illinois  Public  Service  Com- 
pany will  spend  in  the  next  two  years  not  less  than  three 
millions  of  dollars,  if  it  lives  up  even  in  a minimum  way 
to  what  should  be  spent  to  do  full  justice  to  the  com- 
munities served,  and  other  large  customers  served  by  the 
company.  The  company  has  at  present  a fairly  large 
floating  debt,  over  two  millions  of  dollars,  and  I don’t 
know  now  how  that  floating  debt  is  to  he  taken  care  of. 
Fortunately,  three-quarters  of  a million  of  that  is  owing 
to  the  holding  company,  which  is  very  largely  interested 
in  the  ultimate  equity  of  the  Central  Illinois  Public  Serv- 
ice Company,  and  will  be  the  last  fellow  to  be  paid. 


Chairman  Wilkerson : Which  fellow  is  that? 

A.  Middle  West  Utilities  Company.  The  Middle  West 
Utilities  Company  has  loaned  the  Central  Illinois  Public 
Service  Company  two  millions  of  dollars,  for  which  the 
Middle  West  took  the  common  stock  of  the  Central  Illi- 
nois Public  Service  Company  at  par.  So  this  $10,500,000 
— I am  answering  now  how  we  got  some  of  the  money — 
that  money  went  into  the  property  without  any  profit  to 
an  outsider.  That  money  was  borrowed  25  and  50  thou- 
sand at  a time,  as  much  as  I could  get  at  a time,  and  it 
aggregated  finally  two  millions,  and  that  debt  was  liqui- 
dated with  the  consent  of  this  commission  by  two  million 
of  common  stock  of  the  Central  Illinois  Public  Service 
Company. 

At  the  end  of  this  last  year,  also  with  the  consent  of 
this  commission,  the  Central  Illinois  Public  Service  Com- 
pany acquired  from  the  Middle  West  Utilities  Company 
for  $1,250,000  of  common  stock  certain  public  utility 
properties  in  Illinois,  namely,  the  Central  Illinois  Utility, 
Hamilton  Utilities,  Hoopeston  Gas  & Electric  Company 
and  a small  eastern  Illinois  ice  company.  These  newly 
acquired  properties  will  annually  bring  to  the  Central 
Plinois  Public  Service  Company  $500,000  gross  incom^e. 
There  is  another  million  and  a quarter  of  value,  in  my 
judgment,  which  has  been  put  behind  our  prior  lien  se- 
curities. 

Now,  as  to  the  question  of  the  rate  of  return,  I appre- 
ciate that  to  say  a definite  percentage  is  merely  a recital 
automatically  of  an  individual  opinion,  but  I can’t  escape 
this  conclusion  that  if  the  commission  operating  along 
the  lines  indicated  by  me  earlier  today  have  found  seven 
and  eight  per  cent  rate  of  return  on  the  fair  and  reason- 
able value  of  the  property  to  be  equitable  and  just  in 
normal  times,  that  it  is  not  necessary  to  go  into  a discus- 


377 


sion  of  how  many  bonds  are  out,  because  it  has  nothing 
to  do  with  it,  or  how  much  stock  is  out,  because  that  has 
nothing  to  do  with  it,  because  you  are  looking  at  the  value 
of  the  property  involved.  Any  reasonable  man  must  con- 
clude if  seven  or  eight  per  cent  in  nominal  lines  is  found 
repeatedly  fair  and  equitable,  certainly  a greater  percent 
must  be  found  to  be  equitable  in  the  situation  at  present, 
involving  all  of  the  conditions  with  which  we  are  all  thor- 
oughly familiar,  and  which  has  been  recited  from  every 
angle  at  the  hearing  in  Chicago  and  here.  My  own  per- 
sonal judgment  is  it  should  never  be  less  in  these  times 
than  ten  per  cent,  from  there  to  twelve  per  cent,  depend- 
ing on  certain  peculiar  conditions  that  might  exist  in  one 
case  and  not  in  another.  I can’t  go  into  any  detail  in 
regard  to  that,  I have  no  defense  for  that.  It  is  my  de- 
liberate opinion  if  public  utilities  are  to  go  into  the 
money  market,  where  money  like  every  other  commodity, 
is  high  or  low  in  accordance  with  the  law  of  supply  and 
demand,  and  be  successful  in  seeking  that  utility’s  fair 
share  of  the  money  so  required,  that  it  must  pay  the  price 
and  it  can’t  pay  the  price  on  any  basis  of  seven  or  eight 
per  cent  return  on  a fair  value  of  the  property. 

Commissioner  Funk:  Mr.  Sampseli? 

A.  Commissioner  Funk. 

Q.  Would  there  be  any  difference  in  your  judgment  as 
to  the  advantage  in  utilities  over  what  might  be  termed 
two  theories ; namely  these,  a rather  low  but  fair  valua- 
tion, coupled  with  a high  rate  of  return,  or  a more  lib- 
eral valuation  with  somewhat  lower  rate  of  return,  assum- 
ing that  the  multiplication  in  both  cases  would  bring  back 
the  same  dollars  per  year?  I don’t  know  whether  I make 
myself  clear  to  you  or  not. 

A.  I think  I understand  exactly  what  you  mean.  An- 
swering it  as  a hypothetical  proposition,  if  one  or  the 


378 


other  of  those  theories  were  taken,  and  then  adhered  to, 
I,  at  the  moment,  don’t  see  where  there  would  be  any 
great  difference,  because  you  would  come  to  the  same 
mathematical  conclusion  in  dollars  and  cents.  I do  feel, 
however.  Commissioner  Funk,  that  the  safest  way  is  to 
find  all  the  property,  to  seek  and  find  all  of  the  property, 
and  in  that  there  should  be  included,  of  course,  the  esti- 
mates and  findings  of  the  engineers  of  the  commission, 
because,  after  all,  they  are  the  men  that  have  to  check 
the  company’s  work.  Having  found  that  property,  a 
generous  margin  should  be  given  to  that  property  for 
hidden  values,  and  omissions.  It  is  better  to  find  the 
aggregate  property  liberally  and  then  permit  a rate  of 
return  which  has  some  sort  of  consistent  relationship  to 
tlie  prevailing  conditions  and  the  value  of  money  at  the 
time  that  such  values  and  prices  are  made  up. 

Q.  That  is  the  point  I had  in  mind.  In  order  to  do 
that,  isn’t  the  easiest  way  and  the  best  way,  and  the  most 
equitable  way,  to  take  what  you  might  term  a lower  valu- 
ation, and  have  the  varying  factor  be  somewhat  in  pro- 
portion, corresponding  to  the  money  market  as  it  varies 
from  year  to  year. 

A.  If  you  mean  by  taking  a lower  valuation,  taking 
a valuation  of  the  kind  I have  referred  to  in  our  case, 
where  it  was  admitted  by  the  engineer  that  it  was  so  con- 
servative that  it  could  not  have  been  successfully  at- 
tacked, and  if  you  mean  by  low  value  such  a low  base, 
that  there  is  a reasonable  certainty  that  the  subject  has 
been  fairly  treated,  then  I think  the  fluctuating  element 
being  in  the  rate  of  return  would  not  only  be  the  better 
way,  but  the  only  equitable  way  to  work  it  out.  I would 
also  want  to  be  sure  that  all  of  the  property  that  the  com- 
pany has  paid  its  money  for,  should  be  found,  be  returned 
and  be  accounted  for  on  an  exceedingly  liberal  basis. 


379 


I would  like  to  say  just  one  word,  if  I may,  on  the  way 
that  I personally  view  this  present  situation  so  far  as 
it  relates  to  the  Commission,  not  in  the  exercise  of  its 
duties,  but  in  its  general  standing,  as  viewed  by  the  par- 
ties most  directly  concerned,  namely,  the  companies,  and 
the  public,  who  are,  of  course,  also  concerned,  hut  more 
indirectly.  Now,  I have  a very  close  acquaintanceship  with 
a great  number  of  different  people,  people  in  different 
walks  of  life  throughout  the  4,500  square  miles  served 
by  this  company,  and  such  an  acquaintanceship  as  I think 
should  give  me  the  right  to  speak  about  this  subject  with 
more  or  less  reasonableness,  and  it  is  my  opinion  that 
the  greatest  stir  and  the  most  criticism,  such  as  we  have 
discussed  today,  arises  in  the  first  instance  from  the  poli- 
ticians; and  in  the  second  instance,  does  not  get  very 
far  from  them.  In  other  words,  it  is  my  deliberate  opin- 
ion that  the  public  as  such,  that  the  better  thinking  ele- 
ment in  the  town,  is  not  adverse  to  what  has  been  done  by 
this  Commission.  This  opinion  is  substantiated  by  the 
fact  that  at  the  last  hearing  in  that  rate  case,  with  148 
communities  directly  involved,  there  was  present  only 
one  representative  of  any  city.  It  may  be  contended  that 
was  because  those  rates  did  not  immediately  affect  the 
street  lights  or  the  municipal  pumping — but  I know  from 
what  information  I have  been  able  to  obtain  from  my 
travels  throughout  our  territory,  that  the  public  citizen- 
ship, that  part  of  the  citizenship  which  has  a right  to 
speak  upon  constructive  measures,  looks  upon  the  things 
done  by  this  Commission  in  Illinois  as  necessary.  I want 
to  say  frankly  I have  an  awful  lot  of  sympathy  for  my- 
self as  president  of  these  companies.  I could  quit  if  I 
could  be  absolutely  false  to  my  opinion,  if  I threw  away 
my  individual  holdings.  I have  just  as  much  sympathy 
for  the  individual  members  of  this  Commission,  or  any 


380 


other  Commission,  that  has  had  to  go  through  the  period 
of  trials  that  we  have  all  been  confronted  with  since  the 
war.  Nevertheless,  we  can’t  escape  the  fact  that  there  is 
existing,  both  to  the  man  who  runs  the  utility,  and  to  the 
man  who  sits  on  the  Commission,  a responsibility  from 
which  he  can ’t  escape. 

As  I look  at  the  question  of  credit,  the  question  of 
whether  or  not  we  can  successfully  bring  back  to  us  the 
big  and  little  investors,  both  in  our  primary  and  junior 
securities,  I feel  confident  if  this  Commission  adopts  as 
a basis  of  action  a method  of  procedure  such  as  I feel 
sure  they  will  adopt  and  are  adopting,  as  we  go  along  in 
working  out  these  difficulties,  which  must  be  worked  out, 
there  will  be  a return  of  confidence  in  public  utilities 
which  will  in  turn  reflect  itself  in  their  securities.  Public 
utilities  must  continue  to  function,  and  function  prop- 
erly. The  man  Avho  says  we  will  quit  does  not  realize  his 
public  responsibility.  As  we  go  along,  I believe  that,  if 
the  utilities,  on  the  one  side,  present  the  facts  fairly  and 
squarely  to  the  Commission,  and  the  Commission,  on  the 
other  side,  performs  its  duties  as  it  sees  them,  without 
regard  to  what  any  man  may  say,  whether  he  is  the  owner 
of  an  utility  or  a professional  politician,  we  will  soon  see 
the  time  when  our  securities  will  have  the  place  among 
the  securities  of  this  country  to  which  they  are  entitled 
because  they  have  advantages,  and  because  they  are  regu- 
lated and  are  a monopoly.  There  will  be  times  when 
large  industries  will  probably  close  their  doors.  The 
period  of  the  empty  dinner  pail  will  come.  It  must  come. 
It  is  the  evolution  of  affairs.  Then  public  utility  securi- 
ties will  come  to  the  top,  and  come  to  the  top  with  greater 
confidence  on  the  part  of  those  who  held  them  during  this 
struggle,  and  who  were  lucky  enough  to  get  them  since. 


381 


There  are  one  or  two  little  matters  I expected  to  talk 
about,  inasmuch  as  I thought  this  was  a field  day  and 
I might  never  get  another  such  opportunity.  One  has 
to  do  with  what  seems  to  he  a tendency  on  the  part  of 
the  Commission  to  penalize  the  utility  that  is  down,  be- 
cause at  the  moment  in  a particular  spot  he  can’t  give 
good  service  and  because  of  this  tendency  that  utility 
cannot  have  rate  relief.  I can’t  see  that.  I am  not  here 
to  make  an  argument,  but  I do  want  to  say  that  this  is 
tending  in  a direction  and  to  a place  where  we  will  have 
to  find  out  whether  that  is  the  law.  Another  angle  is  the 
somewhat  similar  attitude  of  compelling  companies  to 
make  extensions,  per  se,  where  they  are  wholly  unprofit- 
able, because  the  company  may  have  in  the  whole  of  its 
property  profitable  returns.  One  case  I have  in  mind  is 
that  of  a particular  utility  that  only  earns  two  per  cent 
on  what  the  Commission  has  found  to  be  the  value  of  the 
property.  In  other  words,  the  whole  property’s  profit 
was  two  per  cent  on  the  Commission’s  value  of  that  prop- 
erty, and  the  company  was  ordered  to  spend  money  to 
make  further  extensions,  which  pay,  I suppose,  a frac- 
tion of  a per  cent  return.  The  operating  expenses  were 
90  per  cent  of  the  gross  income.  It  was  a small  matter. 
Of  course,  in  the  interest  of  harmony,  if  an  operator  is 
smart,  he  forgets  those  things,  but  I do  think  that  when 
incidents  of  this  kind  arise  in  a hundred  directions  and 
requests  for  similar  unprofitable  extensions  come  which, 
in  the  aggregate,  • mean  thousands  of  dollars,  that  we 
should  not  pass  by  without  protesting,  especially  when 
such  an  opportunity  as  this  is  presented,  in  which  to  call 
such  facts  to  the  attention  of  this  Commission. 

Chairman  Wilkerson:  Did  you  have  any  particular 
case  in  mind? 

A.  I do,  yes. 


382 


Q.  What  was  that? 

A.  The  last  one  is  the  Oarbondale  case,  where  we 
were  compelled  to  extend  a thousand  feet  of  water  main 
costing  $2,000,  returning  $300,  and  the  operating  ex- 
penses at  the  present  time  are  90  per  cent  of  the  gross, 
and  the  return  on  the  whole  property  at  Carbondale  is 
two  per  cent. 

Q.  When  was  that  ? 

Commissioner  Shaw:  I remember  the  case,  and  the 
facts  stated  in  the  order  do  not  correspond  with  what 
Mr.  Sampsell  is  telling.  Either  you  are  wrong  or  this 
Commission 

A.  If  I am  wrong,  I 

Commissioner  Shaw:  Some  hydrant  rentals  you  are 
losing  track  of. 

A.  I wish  to  mention  further  the  fact  that  the  mu- 
nicipality that  pays  the  hydrant  rental  owes  us  about 
$12,000,  and  hasnT  paid  or  will  not  pay,  as  I remember 
it.  That  is  not  a matter  that  concerns  the  Commission, 
that  is  true.  If  we  do  get  it  we  are  lucky.  Since  that 
time  our  local  man  states  he  has  had  five  or  six  different 
applicatioiiis  for  extensions.  We  simply  can’t  do  it. 
At  the  outside 

Commissioner  Lucey:  Why  don’t  you  collect  your 
money? 

Commissioner  Shaw : Why  don’t  you  appeal  the  order? 
You  have  your  redress  in  the  courts.  Why  don’t  you 
appeal  the  order? 

A.  Because  I disbelieve  in  that  policy.  I think  you 
will  search  the  records  in  vain  to  find  any  appeal  from 
this  Commission  by  the  Central  Illinois  Public  Service 
Company. 


383 


Commissioner  Shaw:  I don’t  think  you  will  hurt  the 
feelings  of  the  Commission  by  an  appeal. 

A.  I don’t  think  that  is  the  way  to  do.  I believe  in 
education,  and  that  it  is  two-fold:  we  have  to  be  edu- 
cated in  our  duties  toward  the  Commission,  and  we  try 
in  our  humble  way  to  show  where  the  Commission  is 
wrong.  I don’t  believe  in  trying  out  our  Commission 
difficulties  by  law-suit.  This  seems  to  be  a particular  art, 
a particular  business  that  we  ought  to  be  able  to  run 
without  going  to  the  courts,  for  the  most  part. 

Mr.  Alschuler : I think  of  nothing  else. 

Commissioner  Lucey:  I asked  you  why  you  didn’t 
collect  the  money! 

A.  I beg  your  pardon.  We  have  tried.  We  usually 
try  by  a friendly  suit  to  get  the  money  from  our  munici- 
palities that  is  uncollectible.  Once  in  a while  we  get  city 
warrants  which  we  trade  to  the  local  tax  collectors,  where 
we  have  no  money  to  pay  the  taxes.  But  really,  frankly 
and  seriously,  this  company  has,  I think,  $200,000  tied  up 
in  much  the  same  way.  You  say,  ‘‘why  don’t  we  collect 
it!”  We  have  to  do  business  with  those  people.  While 
we  should  collect  it — ^we  try  to  collect  it — ^we  have  to  live 
there,  we  have  to  maintain  the  best  public  relations  we 
can  where  they  are.  All  the  time  the  company  goes  on 
serving  these  towns  and  getting  its  payments  from  them, 
it  has  to  get  them  gradually,  and  in  the  meantime  create 
no  opportunity  to  give  any  politician  a chance  to  be  mayor 
or  county  judge  or  something  else,  because  of  our  water 
situation  or  light  situation. 

Mr.  Alschuler : That  is  all,  Mr.  Sampsell. 

Chairman  Wilkerson:  Is  there  anybody  else  that  de- 
sires to  be  heard  today!  (No  response.)  Is  there  anyone 
who  desires  to  ask  any  of  the  witnesses  who  testified 


384 


today  any  questions  at  some  further  hearing?  If  you 
will  indicate  that  fact,  we  will  make  arrangements  for 
opportunity  for  such  examination. 

Mr.  Monroe:  I don’t  care  to  make  any  cross-examina- 
tion at  this  time.  I don’t  know  whether  any  municipali- 
ties care  to  go  into  it  or  be  heard  in  it  or  not.  How  long 
does  this  Commission  expect  to  hold  this  matter  open? 

Chairman  Wilkerson:  It  was  the  request,  I think,  of 
the  applicants,  that  there  he  at  least  one  additional  hear- 
ing in  order  that  the  record  might  be  supplemented  by 
some  facts  which  were  not  present  today.  Therefore,  at 
another  hearing  two  weeks  from  today  or  tomorrow — 
two  weeks  from  today,  probably,  there  will  be  an  oppor- 
tunity for  further  hearing.  Did  you  desire  to  submit 
something  today? 

Mr.  Monroe:  No. 

Chairman  Wilkerson:  We  would  be  pleased  to  hear 
you  on  anything  by  the  way  of  testimony  or  suggestions. 

Mr.  Alschuler:  I wish  to  suggest  if  there  is  any 
desire  on  the  part  of  the  gentlemen  representing  the 
municipalities  to  cross-examine,  to  advise  the  commission 
or  some  of  us,  so  that  we  can  have  these  gentlemen  come 
back  here.  We  don’t  want  to  bring  them  hack  here  if 
there  is  no  cross-examination. 

Chairman  Wilkerson:  No  request  made  so  far.  If 
any  such  request  is  made  you  will  be  given  information 
in  apt  time  to  arrange  for  the  production  of  the  witnesses. 
If  there  is  nothing  further  to  be  presented  today,  the 
hearing  will  stand  adjourned  until  Monday,  the  17th  of 
May,  ten  o’clock  a.  m. 

Whereupon  this  hearing  adjourned  until  May  17, 
1920,  10:00  a.  m.) 


State  of  Illinois 
Public  Utilities  Commission. 

Springfield,  Illinois,  May  17,  1920. 

General  hearing  concerning  ability  of  utili- 
ties to  meet  the  demands  for  service  and 
to  make  the  necessary  enlargements  and 
extensions  therefor. 

Present : 

J.  H.  Wilkerson,  Chairman; 

P.  J.  Lucey,  Commissioner; 

T.  E.  Dempcy,  Commissioner; 

H.  B.  Dakin,  Reporter. 

Appearances ; 

Same  as  before. 

Parties  met  pursuant  to  adjournment. 

Chairman  Wilkerson:  We  are  now  ready  to  proceed 
with  the  general  hearing  which  was  continued  until  this 
morning  week  before  last.  Are  the  parties  here  ready  to 
proceed? 

Mr.  Alschuler:  The  utilities  companies,  and  I under- 
stand some  representatives  of  the  chambers  of  commerce 
and  some  city  officials.  I don’t  know  who  they  all  are. 

Chairman  Wilkerson : Very  well.  Have  you  any  more  • 
parties  who  desire  to  be  heard,  Mr.  Alschuler? 

Mr.  Alschuler:  Yes. 

Chairman  Wilkerson : You  may  call  your  first  witness, 
Mr.  Alschuler:  Mr.  Hagenah. 


386 


William  J.  Hagenah,  called  as  a witness  on  behalf  of  the 

ntilities,  having  been  first  duly  sworn,  was  examined 

in  chief  by  Mr.  Alschuler,  and  testified  as  follows: 

Q.  State  your  name,  your  residence  and  your  profes- 
sion or  occupation. 

A.  William  J.  Hagenah,  member  of  the  firm  of  Hage- 
nah  & Erickson,  located  in  the  First  National  Bank 
Building,  Chicago.  Our  business  is  that  of  public  utility 
analysts,  appraisers  and  investigators.  We  have  a staff 
of  accountants,  engineers  and  rate  experts,  and  are  or- 
ganized to  perform  investigations  along  the  lines  of  the 
practice  of  public  service  commissions  on  behalf  of  cor- 
porations, cities  and  states. 

Q.  State  generally,  Mr.  Hagenah,  your  education 
along  those  lines  and  your  experience. 

A.  I am  a graduate  of  the  University  of  Wisconsin, 
where  I spent  six  years  in  university  work.  I have  been 
engaged  in  specializing  in  public  utility  investigation 
work  for  the  last  17  years.  From  1905  to  1907  I was 
appointed  deputy  commissioner  of  labor  and  industrial 
statistics  of  Wisconsin  and  thus  made  investigations  of 
public  utility  properties  before  there  was  any  public  util- 
ity law  in  that  state.  In  1907,  when  the  public  utilities 
law  was  passed,  I was  appointed  to  the  position  of  chief 
of  the  accounting  and  rate  department  of  the  Railroad 
Commission  and  there  had  charge  of  the  investigations  of 
all  the  public  utility  companies  embracing  over  1,060  in 
number. 

I held  this  position  with  the  Wisconsin  Commission 
until  June,  1910,  when  I was  given  a leave  of  absence  for 
one  year  to  engage  in  special  employment  with  the  City 
of  Chicago  calling  for  an  investigation  embracing  a cost 


387 


analysis  and  rate  study  of  the  Chicago  Telephone  Com- 
pany. Before  that  investigation  was  completed  I was 
further  engaged  by  the  City  of  Chicago  to  make  an  ap- 
praisal and  rate  study  of  the  Peoples  Gas  Light  & Coke 
Company  property.  Both  of  these  investigations  were 
completed  and  the  results  embodied  in  reports  which 
have  been  printed. 

In  July,  1911,  I severed  my  connection  with  the  City 
of  Chicago  and  also  from  the  Eailroad  Commission  of 
Wisconsin  where  I was  retained  in  a consulting  capacity. 
I then  engaged  in  private  practice  alone  until  May,  1916, 
when  I was  joined  by  Halford  Erickson,  who  at  that  time 
was  the  chairman  of  the  Railroad  Commission  of  Wiscon- 
sin. Since  May,  1916,  we  have  practiced  under  the  firm 
name  of  Hagenah  & Erickson. 

We  have  made, — that  is,  the  firm  and  the  members  of 
the  firm, — investigations  embracing  appraisals,  cost  an- 
alyses and  rate  studies  of  gas,  electric  light,  street  rail- 
way, water  and  telephone  utilities  in  most  of  the  larger 
cities  of  the  United  States  and  in  Canada  and  some  work 
in  Mexico.  The  value  of  the  public  utility  properties  so 
analyzed  by  our  firm  and  its  members  exceeds  eight  hun- 
dred million  dollars  in  value.  The  amount  of  railroad 
property  which  we  have  appraised  or  for  which  we  have 
made  cost  investigations  and  rate  studies  exceeds  six  hun- 
dred million  dollars,  making  approximately  fourteen  hun- 
dred million  dollars  of  property  which  we  have  investi- 
gated in  matters  coming  before  public  service  commis- 
sions, the  Interstate  Commerce  Commission,  the  Fed- 
eral Trade  Commission  and  similar  bodies  in  Canada.  We 
have  made  appraisals,  cost  analyses  and  rate  studies  of  one 
or  more  public  utilities  and  in  some  instances  all  the  public 
utilities  in  many  large  cities.  I can  give  the  names  of 
those  in  excess  of  fifty  thousand  population;  I will  not 


388 


mention  those  in  cities  of  smaller  population.  Our  work 
has  been  in  New  York  City,  Chicago,  St.  Louis,  Cleve- 
land, Detroit,  Milwaukee,  Buffalo,  Washington,  D.  C., 
Montreal,  Toronto,  Los  Angeles,  Portland,  Oregon,  In- 
dianapolis, Columbus,  Akron,  Dayton,  Eichmond,  Vir- 
ginia, Memphis,  Louisville,  Birmingham,  Charleston, 
Grand  Rapids,  Duluth,  Salt  Lake  City,  Butte,  Des  Moines, 
Tulsa,  Wichita,  Topeka,  Niagara  Falls,  Flint,  Spring- 
field,  Mass.,  Springfield,  Illinois,  Rockford,  East  St. 
Louis,  Peoria,  Racine,  and  quite  a number  of  properties 
in  cities  of  about  fifty  thousand  population. 

I have  been  connected  with  the  Public  Service  Com- 
mission of  the  State  of  New  York  for  special  investiga- 
tions, have  represented  for  nearly  two  years  the  Railroad 
Commission  and  Public  Utility  Commission  of  North  Da- 
kota, making  appraisals  and  rate  studies  of  utility  prop- 
erties in  that  state  for  the  state  authorities,  and  we  are 
now  acting  for  the  Railroad  and  Public  Utility  Commis- 
sion of  Tennessee  in  making  rate  studies  and  appraisals 
of  the  gas  and  electric  properties  in  Memphis.  We  have 
also  represented  a large  number  of  cities  throughout  the 
United  States  and  Canada. 

Q.  Mr.  Hagenah,  as  a result  of  the  studies  that  you 
have  made,  will  you  give  us  your  observation  as  to  the 
causes,  effects  and  possibly  period  of  time  in  which  the 
effects  will  be  manifest  surrounding  present  day  condi- 
tions in  the  public  utility  field? 

A.  I have  for  a number  of  years  been  engaged  in 
making  studies  of  an  economic  and  financial  nature  of 
the  forces  at  work  throughout  the  world  leading  to  in- 
creases in  the  level  of  commodity  prices,  wages  and  the 
cost  of  money.  These  studies  have  been  based  upon  fun- 
damental conditions  as  they  existed  prior  to  the  Euro- 


389 


pean  War  and  further  as  these  conditions  have  been  af- 
fected or  aggravated  by  the  European  War.  In  my  tes- 
timony this  morning  I will  confine  myself  to  the  treat- 
ment of  these  conditions  in  the  broad,  underlying  way 
in  which  they  have  affected  all  classes  of  industry  and 
especially  public  utilities  both  from  their  own  stand- 
point and  with  respect  to  other  industries  and  as  they 
have  affected  the  particular  problem  of  public  utilities 
in  the  United  States.  I do  not  want  to  be  influenced 
by  the  experience  of  any  particular  utility  as  the  result 
of  local  conditions,  nor  by  any  single  incident  which  has 
affected  the  public  utility  business,  but  rather  to  confine 
myself  to  general  conditions. 

The  treatment  of  this  subject  lends  itself  to  a division 
into  two  general  subjects;  first,  the  fundamental  con- 
ditions which  were  operative  prior  to  1914,  and  secondly, 
the  conditions  as  they  have  developed  from  the  war.  In 
treating  the  conditions  which  were  effective  prior  to  1914 
it  is  possible  to  approach  the  subject  from  a considera- 
tion of  conditions  in  the  United  States  following  the 
Civil  War  to  1914,  because  the  economic  and  financial 
history  of  the  United  States  assumed  an  entirely  differ- 
ent character  after  the  Civil  War,  creating  a different 
economic  epoch  in  the  development  of  this  country.  Dur- 
ing the  period  from  1861  to  1914  there  were  effective 
conditions  which  vitally  determined  the  course  of  indus- 
try generally  but  more  particularly  public  utilities,  with 
the  result  that  prior  to  the  opening  of  the  European 
War  conditions  were  at  work  which  were  bringing  the 
public  utilities  and  the  railroads  face  to  face  with  so  des- 
perate a condition  as  to  make  necessary  extensive  legis- 
lation and  special  consideration  from  public  service  com- 
missions. 

The  first  of  these  was  what  economists  refer  to  as  the 


390 


great  increase  in  the  gold  supply,  which  was  operating 
to  increase  very  substantially  the  cost  of  living  and  the 
cost  of  money.  There  is  a close  relationship  between  the 
supply  of  gold  and  the  pric&  level.  As  the  amount  of  gold 
in  the  world  increases,  the  level  of  prices,  wages  and 
interest  rates  advances.  This  is  well  indicated  by  com- 
paring the  amount  of  gold  produced  each  year  from  1861 
to  1914  with  the  price  level  which  prevailed.  Without 
going  into  a discussion  of  the  details  it  is  sufficient  to 
say  that  during  the  period  from  1861  to  1896,  which  was 
a period  of  generally  declining  prices,  there  was  a rela- 
tive and  absolute  decline  in  the  amount  of  gold  pro- 
duced. Following  1896  the  increase  in  gold  production 
was  very  marked  and  since  1896  the  increase  in  the  price 
level  has  been  very  rapid.  It  would  follow,  therefore, 
that  so  long  as  the  production  of  gold  is  increasing  at  a 
very  rapid  rate  there  must  be  a very  rapid  rise  in  the 
level  of  prices  and  interest  rates.  It  had  resulted  in  a 
high  level  of  prices  and  interest  rates  even  prior  to  1914. 
Industrial  corporations  were  able  to  adapt  themselves  to 
this  rise  of  price  level  by  increasing  their  prices,  but 
the  railroads  and  public  utilities  were  unable  to  do  so,  so 
that  for  a period  of  nearly  10  years  prior  to  the  war 
it  was  indicated  by  the  statistics  and  testified  by  those 
making  special  studies  on  this  subject  that  the  railroads 
and  public  utilities,  unless  special  conditions  and  legis- 
lation were  created,  would  soon  find  themselves  in  a se- 
riously embarrassed  condition.  The  credit  of  the  rail- 
roads was  failing  year  by  year  prior  to  1914;  that  of 
the  public  utilities  was  failing  for  fundamental  reasons 
even  more  so  than  in  the  railroad  business,  but  the  situa- 
tion was  saved  by  the  fact  that  the  great  growth  of  the 
cities  in  population  made  it  possible  for  the  utilities  to 
develop  their  business  very  rapidly.  The  industry  was 


391 


new,  it  was  flexible  and  could  adapt  itself  to  this  con- 
dition with  the  result  that  there  were  economies  prior  to 
1914  in  the  public  utility  business  not  present  in  the 
railroad  business,  so  that  the  public  utility  business  as 
a whole,  although  approaching  an  embarrassment,  was 
in  a somewhat  better  position  in  1914  than  was  the  rail- 
road business. 

Along  with  the  constant  rise  in  price  level,  and  the 
constant  rise  in  interest  rates,  which  I will  refer  to  later 
in  connection  with  some  charts,  there  developed  the  great 
movement  of  population  from  the  country  districts  to  the 
cities,  bringing  about  a congestion  of  traffic  in  all  lines  of 
public  utilities  resulting  in  a much  greater  growth  of 
public  utilities  than  in  any  other  class  of  business,  driv- 
ing them  into  the  money  market  for  larger  sums  of 
money  than  other  classes  of  business  and  keeping  them 
in  the  market  constantly  because  of  the  expansion  pro- 
grams on  extensive  scales  each  year.  This  condition 
put  an  especially  strained  situation  on  the  public  utilities, 
and  with  that  condition  of  strained  credit  which  pre- 
vailed in  1914  and  which  had  been  growing  steadily  worse 
for  the  10  year  period  preceding  1914,  the  European 
War  developed,  which  created  a complete  upheaval  of 
economic  conditions  to  the  extent  that  a bad  situation 
for  the  public  utilities  and  railroads  was  made  infinitely 
worse. 

The  effect  of  the  war  on  prices  has  been  very  marked 
in  three  directions;  first,  through  the  vast  destruction 
of  material  which  has  directly  resulted  in  a very  high 
cost  of  capital,  in  the  destruction  of  lives  and  in  the  re- 
moval of  lives  from  productive  enterprise  through  the 
wounding  of  men,  and  lastly  through  the  pronounced  in- 
flation of  the  currency.  Official  statistics  show  that  there 


392 


were  fifty-eight  million  men  in  arms  for  a period  of  over 
four  years,  that  ten  million  five  hundred  thousand  were 
killed  and  the  total  casualties  were  twenty-four  million 
five  hundred  and  sixty-two  thousand.  This  large  number 
of  men  killed  and  wounded  has  completely  upset  the  eco- 
nomic machinery  so  that  at  the  present  time  industry  and 
finance  is  unable  to  function  normally  with  the  result  that 
production  is  far  below  normal,  prices  are  high  and  in- 
terest rates  are  exceedingly  high,  making  it  especially 
difficult  for  those  classes  of  business  charged  with  a pub- 
lic interest  which  cannot  increase  their  rates  without  pub- 
lic consent  to  meet  this  particular  condition,  and  finding 
it  increasingly  difficult. 

While  there  has  been  this  tremendous  destruction  in 
property  and  in  lives  and  inflation,  the  result  of  which  is 
almost  beyond  the  power  of  the  imagination  to  under- 
stand, the  utilities  have  suffered  most  of  all  the  classes 
of  business.  I have  prepared  here  for  your  considera- 
tion a table  or  chart  based  on  the  statistics  compiled  by 
the  British  authorities  showing  the  price  level  which  has 
prevailed  in  England  over  a period  of  more  than  one 
hundred  years.  This  is  the  most  complete  comparative 
study  of  prices  which  have  been  compiled  by  reliable  au- 
thorities, and  by  an  examination  of  this  price  movement 
it  is  possible  to  understand  something  about  the  extraor- 
dinary conditions  which  have  brought  railroads  and  pub- 
lic utihties  to  the  present  strained  situation. 

Mr.  Alschuler:  Let’s  mark  that  Hagenah  Exhibit  1. 

Chairman  Wilkerson.  It  may  be  admitted. 

Whereupon  said  document,  so  marked  for  identifi- 
cation ‘‘Hagenah  Exhibit  1”  is  hereby  made  a part 
of  the  record  in  this  case. 


'\ 

w 


Hagenah  Exhibit  1. 


393 


The  Witness : This  blue  print  shows  a curve  made  up 
of  parallel  lines,  each  representing  the  price  level  for  a 
period  being  the  average  of  10  years.  The  significant 
thing  about  this  century  of  prices  is  the  effect  which  war 
has  had  on  prices.  Beginning  with  1817  there  is  a very 
high  level  of  prices  resulting  from  the  Napoleonic  wars. 

Commissioner  Lucey:  These  parallel  lines,  do  they 
represent  certain  commodities  or  do  they  represent  wheat, 
coal  or  what? 

A.  They  represent  a large  number  of  commodities  in 
the  average  including  wheat,  coal,  steel,  copper,  wool, 
gold,  practically  all  the  elements  entering  into  the  cost  of 
living  and  production.  It  is  what  is  known  as  the  Sauer- 
beck service. 

The  Napoleonic  wars  extended  over  a period  of  nearly 
fifteen  years  in  which  nearly  every  great  power  of  the 
world  was  engaged.  The  destruction  of  lives  and  prop- 
erty and  wealth  at  that  time  is  comparable  in  terms  of 
loss  to  the  destruction  at  the  present  time,  although 
relatively  it  is  infinitely  greater  now.  I want  to  call  at- 
tention to  the  very  slow  rate  at  which  prices  declined 
after  this  war. 

The  second  period  of  high  prices  was  in  the  middle 
of  the  century  and  prices  rose  from  1849  to  1873  as  the 
result  of  great  wars,  the  Crimean  war,  the  Austro-Italian 
wars,  the  Austro-Prussian  war  and  the  American  Civil 
war  and  the  Franco-Prussian  war.  This  has  resulted  in 
a very  high  price  level. 

Again,  I call  attention  to  the  very  slow  decline  in  prices 
following  these  wars  until  1896,  when  with  the  large  in- 
crease in  the  amount  of  gold,  the  development  of  the  pres- 
ent large  scale  production  industrial  system  in  the  United 
States  and  the  great  increase  in  wealth  and  world  com- 


394 


merce,  there  was  a steady  rise  in  prices  throughout  the 
world  until  1914.  During  some  years  this  increase  was  as 
high  as  2.5  to  3 per  cent  in  the  index  number.  It  was  on 
this  already  steadily  advancing  price  level  that  the  world 
war  opened,  bringing  with  it  the  most  violent  increase  in 
prices  in  history.  You  will  note  that  the  parallel  line 
representing  the  10-year  average  of  prices  prior  to  1919 
is  the  highest  in  the  history  of  the  world.  The  dotted 
line  which  is  superimposed  on  these  10-year  averages 
shows  the  price  level  by  months.  That  is  so  high  that  it 
runs  far  off  this  blue  print.  It  has  been  brought  back  in 
a second  section,  but  between  those  lines  there  is  a large 
space  which  is  not  shown  here  at  all. 

In  connection  with  this  table  so  that  you  may  better 
understand  the  operation  of  the  fundamental  laws  grow- 
ing out  of  wars  as  affecting  price  level,  wages  and  in- 
terest rates,  I call  attention  to  this  interesting  fact  that 
from  the  high  period  following  the  Napoleonic  wars  to 
the  high  period  following  the  Civil  War  is  exactly  fifty 
years,  from  the  high  price  level  in  the  middle  of  the  cen- 
tury to  the  exceedingly  high  price  level  at  the  present 
time  is  again  fifty  years.  From  the  low  price  level  fol- 
lowing the  Napoleonic  wars,  which  level  was  not  reached 
until  about  1846,  to  the  low  price  level  reached  in  the 
early  90 ’s,  is  again  approximately  50  years,  and  it  is 
therefore  interesting  to  speculate  whether  these  several 
instances  in  which  the  major  cycle  has  each  time  been 
approximately  50  years  indicates  that  about  50  years  will 
pass  before  we  again  experience  the  price  level  which  cor- 
responds to  the  low  level  of  1896.  Approximately  one- 
half  of  such  50-year  cycle  has  passed,  so  that  on  this  the- 
ory the  decline  in  prices  as  was  true  in  previous  instances, 
will  be  spread  over  a period  of  possibly  25  years.  If  his- 
tory is  to  be  repeated,  a relatively  high  price  level  for 


Hagenab  Exbibit  2. 


/S/^l 


■ ir-^' 
;l-  : , 


395 


commodities,  wages  and  interest  rates  will  be  with  us 
for  so  long  a period  of  time  that  for  all  practical  purposes 
those  engaged  in  the  operation  and  regulation  of  public 
utilities  at  the  present  time  may  accept  it  as  substantially 
a permanent  situation. 

As  opposed  to  the  conditions  in  England  which,  how- 
ever, are  typical  of  the  world  in  general,  I submit  an- 
other blue  print  which  shows  particularly  the  price  move- 
ment in  the  United  States. 

Mr.  Alschuler:  Hagenah  Exhibit  2. 

Chairman  Wilkerson:  It  may  be  received. 

Whereupon  said  document,  so  marked  for  identifi- 
cation ‘‘Hagenah  Exhibit  2^^  is  hereby  made  a part 
of  the  record  in  this  case. 


396 


The  Witness : Let  me  call  attention  to  the  violent  in- 
crease in  prices  brought  about  by  the  Civil  War  from 
1861  to  1864,  and  the  very  slow  rate  at  which  prices,  in- 
terest rates  and  wages  decreased  and  declined.  Note  that 
while  the  great  increase  in  prices  developed  during  a 
period  of  three  years,  it  was  not  until  1883  that  the  price 
level  definitely  returned  to  where  it  was  before  the  de- 
velopment of  the  Civil  War;  and  then  followed  a long 
period  of  depression,  non-employment  and  business  dis- 
tress. 

While  the  public  cannot  expect  conditions  of  this  char- 
acter to  repeat  themselves  exactly,  yet  there  is  a re- 
markable similarity  between  the  price  movement  brought 
about  through  this  war  and  the  conditions  which  devel- 
oped during  the  Civil  War.  Note  the  almost  exact  char- 
acteristics of  the  curve  in  prices  which  followed  from 
1914  to  1919.  The  angles  which  appear  in  the  curve  of 
the  Civil  War  are  almost  exactly  reproduced  in  the  price 
movement  growing  out  of  the  present  war.  If  it  took 
over  fifteen  years  for  prices  to  get  down  to  the  so-called 
normal  following  the  Civil  War,  it  is  reasonable  to  sup- 
pose that  it  will  take  at  least  10  years  for  prices  to  go 
down  following  this  war. 

Commissioner  Lucey:  There  is  a very  marked  and 
rapid  decline  from  the  high  point  following  the  Civil 
War.  While  it  doesn’t  get  all  the  way  down,  yet  it  drops 
say  50  per  cent., — would  you  say  50  per  cent,  in  three 
years  ? 

A.  Not  quite  50  per  cent.,  hut  it  takes  over  three  years 
to  go  down  as  much  as  it  went  up  in  one  year. 

Q.  Well,  it  is  down  in  this  chart  roughly  say  45 
per  cent.  I 

A.  Approximately. 


397 


Q.  Do  you  anticipate  any  such  situation  now? 

A.  No;  for  this  reason.  You  have  touched  on  a most 
significant  feature  of  this  price  movement.  In  1864  when 
it  became  evident  that  the  purpose  of  the  South  was  to 
be  defeated,  prices  began  to  decline.  In  1917  when  it 
became  evident  that  the  purpose  of  the  Central  Empires 
would  fail  prices  did  not  decline.  In  1865  when  peace 
was  declared  in  the  Civil  War  prices  were  well  on  their 
way  downward.  A year  and  a half  after  the  armistice 
was  signed  in  this  war  prices  are  still  advancing.  Prices 
started  to  decline  a year  before  the  Civil  War  was  over. 
A year  and  a half  after  this  war  was  ended  prices  reached 
the  highest  point  in  history  and  they  are  still  advancing. 

Chairman  Wilkerson : That  was  because  there  was  no 
such  complete  disruption  in  the  greater  part  of  the 
United  States  at  the  close  of  the  Civil  War  as  there  is  in 
Europe  today? 

A.  That  is  right;  and  just  because  our  machinery  for 
transportation,  inter-communication  and  everything  else 
was  less  disturbed  in  1864  than  it  is  today,  it  was  in 
so  much  better  position  that  it  could  begin  economic 
reconstruction  and  adjustment  a year  before  peace  was 
declared,  whereas  the  situation  now  is  growing  more  seri- 
ous each  month  and  a year  and  a half  after  the  war  is 
closed  our  price  level  is  still  rising. 

Q.  That  is,  the  victor  in  the  Civil  War  had  its  ma- 
chinery practically  undisturbed? 

A.  That  is  right. 

Q.  While  in  the  European  war, — 

A.  There  is  no  victor. 

Q.  — the  victors,  if  there  were  any,  had  their  machin- 
ery so  much  disturbed, — 


398 


A.  In  an  economic  sense  every  nation  was  defeated. 
The  destruction  was  so  great  that  the  reconstruction  work 
is  now  only  seriously  begun.  In  connection  with  this  chart 
number  two  I have  prepared  a third  chart  from  govern- 
ment statistics  which  is  of  great  interest  at  the  present 
time  since  it  shows  that  while  prices  of  commodities 
tended  downward  after  the  Civil  War  as  indicated  by 
the  Commissioner's  question,  the  prices  of  labor  actually 
continued  to  rise. 

Mr.  Alschuler:  Hagenah^s  Exhibit  3. 

Whereupon  said  document,  so  marked  for  identifi- 
cation ‘‘Hagenah  Exhibit  3^  Ms  hereby  made  a part 
of  the  record  in  this  case. 


Hagenah  Exhibit  3. 


httci  •S£cr/of^,J3jy  er  PL/tNN/N&Or  SrjrrisTicS 
i/s  iv^ft  /NCusrntES  bemho 


399 


The  AVitness:  Table  3 is  an  enlargement  or  a sub- 
division of  the  data  shown  in  the  Civil  War  period  in 
table  2.  It  shows  wholesale  prices,  retail  prices  and 
wages.  The  complete  disturbance  and  violent  upheaval 
of  conditions  in  1865, — from  1864  to  1865,  is  shown  by 
the  peak  in  wholesale  prices.  The  responsiveness  of 
retail  prices  to  wholesale  prices  is  also  shown.  It  also 
shows  that  there  is  less  fluctuation,  but  the  significant 
thing  is  this,  that  while  prices  declined  after  the  Civil 
War,  wages,  which  experienced  in  all  classes  of  work  a 
tremendous  increase,  just  as  they  have  in  this  war,  com 
tinned  to  rise  after  the  Civil  War  just  as  they  are  rising 
at  the  present  time. 

The  only  way  it  was  possible  to  reduce  prices  and  to 
secure  a reduction  in  interest  rates  was  through  the  rapid 
development  of  machinery,  inventions  in  industry  and  the 
speeding  up  of  operations  which  made  it  possible  for  men 
receiving  high  wages  to  produce  so  much  larger  amounts 
of  goods  thah  the  unit  cost  of  labor  even  on  the  higher 
wage  basis  was  lower  than  it  had  been  prior  to  the  Civil 
War,  If  that  condition  is  to  be  repeated,  and  it  is  fol- 
lowing perfectly  at  the  present  time,  for  wages  are  still 
advancing  in  this  country,  then  while  prices  of  commodi- 
ties may  go  downward  in  the  next  10  years,  the  cost  of 
labor  will  not  go  downward.  This  is  of  special  signifi- 
cance to  public  utilities. 

Chairman  Wilkerson : Pardon  me  just  a moment,  may 
I ask  a question  ? 

A.  Yes. 

Q.  Do  you  think  that  any  significance  is  to  be  given 
to  the  fact  that  the  loss  of  life  in  this  country  in  the 
Civil  War  was  such  that  the  loss  of  life  in  this  country 
in  the  late  war  was  really  negligible,  so  far  as  the  de- 
struction of  man  power  was  concerned? 


400 


A.  As  far  as  the  destruction  of  lives  was  concerned 
you  are  absolutely  right.  The  statistics  show  that  our 
loss  of  lives  in  this  war  was  not  nearly  so  great  as  in  the 
Civil  War. 

Q.  I know  I was  rather  surprised  to  find  out  in 
checking  the  figures  roughly  that  the  loss  of  life  in  this 
country  as  a result  of  the  Civil  War  was  comparable, 
for  instance,  with  the  loss  of  life  in  Prance  during  the 
late  war. 

A.  Roughly  I think  that  would  be  comparable. 

Q.  I think  you  will  find  that  within  a few  per  cent, 
that  is  true,  that  this  country  suffered  in  the  destruction 
of  life  in  the  Civil  War  as  much  as  Prance  has  sulfered 
in  the  late  war. 

A.  There  is  this  element,  however,  to  be  taken  into 
consideration  and  that  is  that  during  the  Civil  War  we 
gained  very  largely  from  immigration  from  Europe,  while 
during  this  war  we  have  lost  several  million  men, — 

Q.  Yes,  that  is  your  counter-balancing  element. 

A.  Yes.  While  we  have  lost  no  considerable  number 
of  lives  in  this  war,  we  have  lost  thousands  of  able-bodied 
men  who  returned  to  Europe,  and  we  have  received  no 
great  immigration,  so  the  loss  of  man  power  to  the  coun- 
try is  relatively  the  same.  The  manufacturer  can  speed 
up  his  machinery  and  can  introduce  methods  for  quan- 
tity production,  but  the  public  utility  can  not.  The  labor 
element  in  the  public  utility  business  is  largely  of  a 
fixed  and  supervisory  character.  The  street  car  must 
have  a motorman  and  conductor;  the  street  car  can  not 
run  any  faster  than  it  is  running  at  the  present  time. 
The  same  is  true  of  gas,  electric  and  telephone  apparatus. 
The  spinning  machine,  the  knitting  machine,  the  machine 
tools,  steel  and  woodworking  and  printing  apparatus 


401 


and  machinery  can  all  be  operated  at  a much  higher 
speed  through  the  introduction  of  automatic  machinery. 
One  man  getting  eight  dollars  a day  can  produce  pos- 
sibly three  times  as  much  as  the  man  before  the  war  on 
a three  dollar  a day  basis,  but  that  is  not  true  in  the 
public  utility  business.  The  labor  there  is  .largely  fixed ; 
the  element  of  quanity  production  is  not  present,  so 
that  during  the  period  following  the  war,  even  though 
prices  of  commodities  should  decline,  which  has  not  yet 
occurred  in  this  country,  the  wage  level  will  continue  to 
rise,  and  that  will  hit  the  public  utility  harder  than  any 
other  class  of  business,  because  just  as  it  can  not  increase 
its  rates  to  take  care  of  the  rising  price  level  neither 
can  it  readjust  its  wage  conditions  to  get  quantity  re- 
sults on  increasing  wage  levels. 

In  connection  with  these  various  prints  and  charts 
which  I have  presented  showing  a large  increase  in  the 
price  level,  it  is  interesting  to  note  what  has  been  the 
ruling  cause  which  has  brought  about  this  high  level  of 
prices,  wages  and  interest  rates.  The  most  important  of 
these  in  its  immediate  aspects  is  the  tremendous  demands 

for  money  from  the  Government.  This  Government  has 
borrowed  in  the  form  of  Liberty  Bonds  and  in  various 
forms  of  treasury  evidences  of  indebtedness  over  twenty- 
four  billion  dollars,  which  has  been  taken  out  of  the  chan- 
nels of  trade.  We  have  shipped  abroad  and  destroyed 
many  billion  dollars  worth  of  goods  which  have  been 
taken  out  of  productive  and  consumptive  channels.  In 
its  broader  aspects  and  of  a more  permanent  character 
we  have  created  a rather  serious  degree  of  inflation  in  our 
currency.  We  have  so  largely  increased  the  amount  of 
money  that  its  purchasing  power  has  been  very  much 
reduced.  In  Europe  we  see  the  extreme  of  it  where  the 
purchasing  power  has  almost  been  destroyed,  the  worst 


402 


being  in  Russia.  There  is  no  country  except  Argentine 
Republic  where  money  is  at  anything  like  its  old  purchas- 
ing power  in  the  terms  of  international  exchange. 

I have  here  a table  which  shows  the  extent  to  which 
this  condition  has  been  operative  in  the  United  States. 
It  is  taken  from  treasury  statistics  and  government  re- 
ports, showing  the  amount  of  money  in  circulation. 

Mr.  Alschuler:  Hagenah  Exhibit  4. 

Whereupon  said  document,  so  marked  for  identifi- 
cation ‘‘Hagenah  Exhibit  4’’  is  hereby  made  a part 
of  the  record  in  this  case. 


July 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

1912 

1913 

1914 

1915 

1916 

1917 


Hagenah  Exhibit  4 

MONEY  IN  CIRCULATION 


United  States 


Gold 

Silver 

Gold 

Certificates 

Silver 

Certificates 

Notes 

(Greenbacks) 

National 
Bank  Notes 

Federal  Federal  Reserve 
Reserve  Notes  Bank  Notes 

Miscellaneous 

Currency 

Total  Money 
in  Circulation 

Circulation 
per  Capita 

$ 454,905,064 

$ 112,321,355 

$ 42,198,119 

$ 330,657,191 

$ 224,249,868 

$ 215,168,122 

? 

$ 

$ 126,935,247 

$1,506,434,966 

$21.44 

517,589,688 

111,556,690 

37,285,339 

357,849,312 

245,954,622 

226,318,003 

144,429,517 

1,640,983,171 

22.92 

657,950,463 

122,539,886 

35,811,589 

390,126,510 

284,569,022 

222,990,987 

123,871,437 

1,837,859,894 

25.19 

679,738,050 

130,547,250 

32,655,919 

402,136,617 

308,351,842 

237,805,439 

112,836,764 

1,904,071,881 

25.62 

610,806,472 

142,050,334 

200,733,019 

408,465,574 

313,971,545 

300,115,111 

79,008,942 

2,055,150,997 

26.93 

629,790,765 

146,156,537 

247,036,359 

429,643,556 

330,045,406 

345,110,800 

47,524,538 

2,175,307,961 

27.98 

632,394,289 

154,468,577 

306,399,009 

446,557,662 

334,291,722 

345,476,516 

29,802,776 

2,249,390,551 

28.43 

617,260,739 

165,117,934 

377,258,559 

454,733,013 

334,248,567 

399,996,709 

19,076,648 

2,367,692,169 

29.42 

645,817,576 

166,842,169 

465,655,099 

461,138,698 

333,759,425 

433,027,835 

12,902,057 

2,519,142,859 

30.77 

651,063,589 

175,022,043 

485,210,749 

454,864,708 

332,420,697 

480,028,849 

9,272,018 

2,587,882,653 

31.08 

668,655,075 

188,630,872 

516,561,849 

471,520,054 

335,940,220 

548,001,238 

7,337,320 

2,736,646,628 

32.32 

561,697,371 

203,487,845 

600,072,299 

470,211,225 

342,270,055 

589,242,125 

5,975,535 

2,772,956,455 

32.22 

613,244,810 

200,506,822 

782,976,619 

465,278,705 

339,396,322 

631,648,680 

4,963,530 

3,038,015,488 

34.72 

599,337,698 

204,319,698 

815,005,449 

477,717,324 

340,118,267 

665,538,806 

4,203,415 

3,106,240,657 

34.93 

590,877,993 

208,016,245 

802,754,199 

478,597,238 

334,787,870 

683,659,535 

3,662,525 

3,102,355,605 

34.33 

589,295,538 

210,867,772 

930,367,929 

453,543,696 

338,989,122 

687,701,283 

3,237,256 

3,214,002,596 

34.20 

610,724,154 

215,373,772 

943,435,618 

469,224,400 

337,697,321 

705.142,259 

2,915,570 

3,284,513,094 

34.34 

608,400,799 

226,585,263 

1,003,997,709 

469,128,592 

337,215,180 

715,754,236 

2,656,670 

3,363,738,449 

34.56 

611,544,681 

230,266,183 

1,026,149,139 

478,601,977 

337,845,647 

715,180,037 

2,427,763 

3,402,015,427 

34.35 

590,133,619 

223,913,111 

1,072,847,819 

481,970,395 

332,342,246 

785,393,047 

80,374,650 

2,244,687 

3,569,219,574 

35.44 

, 637,250,272 

237,864,783 

1,413,823,289 

489,910,937 

341,719,547 

719,400,794 

182,062,780* 

2,098,165 

4,024,130,567 

39.29 

. 690,574,527 

265,677,472 

1,737,652,359 

477,184,842 

335,961,233 

697,448,551 

544,412,775 

12,693,790 

1,970,078 

4,763,575,632 

45.74 

. 1,114,077,426 

294,503,829 

818,353,349 

379,211,468 

340,042,812 

703,056,066 

1,713,074,255 

15,257,105 

1,851,114 

5,379,427,424 

50.81 

. 984,924,231 

312,620,354 

630,738,364 

216,103,387 

333,814,578 

661,139,198 

2,475,284,532 

136,643,850 

1,779,240 

5,753,047,734 

54.79 

. 919,564,330 

377,415,019 

387,203,974 

128,571,523 

328,573,277 

657,328,165 

2,999,690,207 

198,753,714 

1,686,292 

5,998,786,501 

57.13 

♦Includes  Federal  Reserve  Bank  Notes,  first  issue  in  January,  1916. 
♦♦March  1, 


403 


The  Witness : This  table  is  designed  to  show  the  effect 
of  the  economic  rule  which  is  generally  accepted,  that 
as  the  amount  of  money  in  circulation  increases  in  the 
absolute  and  per  capita,  so  does  the  cost  of  living  in- 
crease. These  columns  show  the  different  classes  of 
money  in  circulation.  The  last  column  shows  the  circula- 
tion per  capita.  Note  that  from  1896  to  1917  the  per 
capita  circulation  of  money  more  than  doubled.  The  Bu- 
reau of  Labor  statistics  show  that  during  this  same  pe- 
riod the  increase  in  the  cost  of  living  embracing  all 
elements  going  into  the  cost  of  living  has  more  than  dou- 
bled, that  this  rate  of  inflation  has  increased  more  rapidly 
during  the  last  three  years  than  at  any  period  in  Amer- 
ican history  since  the  Civil  War,  just  as  the  increase  in 
the  price  level  has  been  so  exceedingly  rapid  as  is  shown 
in  blue  print  chart  No.  2. 

Let  me  call  attention  specifically  to  the  form  of  money 
in  which  there  has  been  the  greatest  increase,  and  that  is 
particularly  in  the  issue  of  federal  reserve  notes,  paper 
money.  Prior  to  1914  we  had  no  paper  of  this  character  in 
existence.  On  March  1,  1920,  we  had  $2,999,000,000  of 
federal  reserve  notes  and  $198,000,000  of  federal  reserve 
bank  notes.  Note  that  during  the  same  time  while  this 
tremendous  increase  of  paper  currency  was  taking  place 
there  was  an  actual  reduction  in  the  amount  of  gold  and  a 
very  marked  decrease  in  the  gold  certificates  in  circula- 
tion,— n condition  which  -must  absolutely  in  the  most  ele- 
mentary and  primary  form  result  in  a very  high  interest 
rate  and  cost  of  money  for  a long  period  of  time,  which 
has  a most  severe  effect  on  every  class  of  industries  and 
perhaps  especially  utilities  which  by  reason  of  their  legal 
status  are  unable  to  adapt  themselves  to  this  condition. 

The  best  students  of  finance  in  this  country  and  in 
Europe  give  no  hope,  on  this  quantity  theory  of  money,  of 


404 


any  substantial  decline  in  the  cost  of  living  until  the 
government  brings  about  a deflation.  Deflation  can  be 
brought  about  in  two  ways : first,  by  so  increasing  inter- 
est rates  and  discount  rates  as  to  bring  about  a forced 
liquidation  and  this  must  be  accompanied  by  more  or  less 
business  depression  and  panic,  but  a panic  would  bring 
about  general  distress  of  so  serious  a character  as  to  out- 
weigh the  advantages  which  it  would  bring  through  defla- 
tion. 

The  other  way  in  which  deflation  can  be  brought  about 
is  the  slow  process  of  maintaining  substantially  the  pres- 
ent circulating  medium  until  business  in  this  country  has 
expanded  and  grown  to  that  stage  where  we  can  show  sub- 
stantially the  same  relationship  between  money  in  circu- 
lation and  business  performance  as  prevailed  prior  to 
1914. 

Commissioner  Lucey:  Won’t  the  issue  of  money  keep 
pace  with  that  increase? 

A.  No;  money  will  not  be  increased  at  that  rate.  If 
it  did  there  would  be  nothing  but  disaster  ahead  for  this 
country  just  as  there  is  in  Russia  and  some  other  conti- 
nental countries.  The  work  of  deflation  is  now  being 
undertaken  by  the  slow  process  of  raising  interest  rates  by 
the  federal  banks,  and  that  must  be  done  with  great  cau- 
tion so  as  not  to  bring  about  a great  business  disturbance, 
for  it  is  naturally  a slow  process  which  must  come 
through  a discontinuance  of  the  rate  of  issue,  the  recall 
of  a certain  amount  of  this  class  of  paper,  liquidation 
of  loans  and  a steady  reconstruction  of  business  which 
will  take  a period  of  possibly  10  or  15  years. 

Q.  Is  it  your  theory  that  this  issue  of  federal  reserve 
notes  and  bank  notes  was  caused  simply  by  the  war? 
Wouldn’t  that  situation  have  resulted  from  the  passage 
of  the  act  and  the  facility  then  afforded, — 


405 


A.  To  some  extent. 

Q.  — to  liquidize  the  currency! 

A.  To  some  extent,  yes,  your  suggestion  is  absolutely 
right.  The  difficulty  which  has  arisen  is  not  from  the 
introduction  of  this  form  of  security  but  the  issuance  of 
the  tremendous  amount  of  it,  which  was  necessary  to 
finance  the  war.  Just  as  we  had  to  raise  immense 
armies  to  meet  the  physical  needs,  so  we  had  to  raise  a 
tremendous  amount  of  circulating  medium  in  order  to 
finance  the  war,  but  we  can’t  demobilize  finances  as  fast 
as  we  can  demobilize  man  power,  and  as  long  as  this  tre- 
mendously large  amount  of  circulation  per  capita  pre- 
vails there  will  be  a high  price  level  and  a high  interest 
level.  That  has  been  true  every  time  in  the  history  of 
the  world  over  the  entire  period  over  which  financial  sta- 
tistics are  available.  The  subject  is  very  exhaustively 
treated  by  such  men  as  Irving  Fisher  of  Yale,  Dr.  Norton 
and  Professor  Clark.  I will  not  quote  from  their  works, 
but  the  record  can  show  that  they  are  authorities  who 
have  treated  this  subject  very  extensively. 

Chairman  Wilkerson:  What  significance  is  to  be  at- 
tached to  the  fact  in  your  judgment  that  in  1917,  for  in- 
stance, referring  to  table  No.  4,  the  gold  part  of  the  cir- 
culation was  in  round  figures  $690,000,000,  and  in  that 
year  the  total  outstanding  is  $4,700,000,000  in  round  num- 
bers ; now,  in  1920  the  gold  circulation  is  in  round  num- 
bers $920,000,000  and  the  total  circulation  is  $6,000,000,- 
000 ; there  is  a slight  decrease  in  the  percentage  of  gold, 
but  not  a very  marked, — 

A.  But  note  the  third  column.  The  gold  certificates 
during  that  same  period  did  suffer  tremendous  shrink- 
age. 

Q.  From  $477,000,000  to  $128,— 


406 


A.  No  — 

Q.  You  think, — 

A.  No,  the  gold  certificates  column,  which  is  the  third 
column  there.  There  was  a decline  from  $1,737,000,000 
to  $387,000,000. 

Q.  So  is  it  your  idea  to  get  the  direct  relation  you 
have  to  take  into  consideration  that  $1,4000,000  which  is 
represented  by  the  shrinkage  in  gold  certificates? 

A.  Yes.  The  calling  in  by  the  government  of  the  gold 
circulation  to  give  temporarily  greater  protection  to  the 
entire  currency  system  has  been  one  of  the  items  that  has 
contributed  to  increasing  the  inflation  and  greatly  in- 
creasing the  circulation  per  capita.  We  have  accom- 
plished but  little,  if  anything,  in  the  way  of  correcting 
this  problem.  Through  this  great  inflation  we  have  built 
up  a very  extended  credit  structure,  the  loans  being  so 
extensive  that  they  are  causing  serious  concern  to  our 
greatest  bankers.  Each  step  in  the  building  up  of  this 
inflation  and  extended  credit  position  has  tended  to  in- 
crease the  price  level  and  compel  individuals  and  busi- 
ness generally  to  adjust  themselves  to  this  new  level.  We 
have  all  been  compelled  to  pay  increased  prices  for  coal, 
clothing,  rents,  labor  and  other  commodities  and  services, 
the  compensation  being  based  on  this  inflated  currency. 
The  difficulties  in  which  the  utilities  find  themselves  are 
the  result  of  the  inconsistency  of  all  classes  of  business 
and  individuals  except  utilities  being  permitted  freely  to 
adjust  themselves  to  this  level,  while  this  one  class  of 
business,  which  is  experiencing  the  same  hardships  that 
have  come  to  every  other  class  of  business,  is  being  de- 
prived of  the  privilege  of  a full  adjustment  for  itself. 
The  continuation  of  this  inconsistency  can  lead  to  no 
other  result  than  the  disruption  of  the  public  utility  busi- 
ness, with  a great  impairment  of  public  utility  service  and 


407 


credit.  Much  of  our  present  inflation  is  traceable  to  the 
form  in  which  our  government  set  about  to  mobilize  it>^ 
financial  resources. 

Commissioner  Lucey:  That  theory  is  on  a sort  of  a 
paper  basis  instead  of  a gold  basis,  is  it,  then? 

A.  Dangerously  near  it.  To  show  we  are  by  no  means 
as  bad  oft  as  the  other  countries  of  the  world,  I have  pre- 
pared a table  which  shows  the  extent  to  which  this  in- 
flating process  has  been  carried  on  in  other  countries  of 
the  world,  which  through  the  close  inter-relationship  of 
commerce  at  the  present  time  is  bound  to  have  a very  seri- 
ous effect  even  on  our  own  country. 

Whereupon  said  document,  so  marked  for  identi- 
fication ‘^Hagenah  Exhibit  5’’  is  hereby  made  a part 
of  the  record  in  this  case. 

Hagenali  Exhibit  5 


NATIONAL  DEBTS  AND  INTEREST  RATES 


'l 

Gross  Debt 
Aug.  1,  1914 

Gross  Debt 

Jan.  1,  1920  Per  Cent. 

Cost  of  Burden 

Interest  Paid 

Wealth 

1913 

1920 

United  States. $ 

1,000,000,000 

$ 26,000,000,000 

8.4  $ 

23,000,000 

$ 1,100,000,000 

Great  Britain . 

3,500,000,000 

42,000,000,000 

44.4 

122,500,000 

2,300,000,000 

France  

6,500,000,000 

33,000,000,000 

46.1 

257,300,000 

2,000,000,000 

Russia  

4,600,000,000 

30,000,000,000 

45.0 

212,200,000 

1,600,000,000 

Italy  

2,800,000,000 

13,000,000,000 

40.0 

93,300,000 

600,000,000 

German  Emp. 

and  States  . 
Austria- 

5,200,000,000 

45,000,000,000 

47.0 

200,000,000 

2,500,000,000 

Hungary  . . . 

3,700,000,000 

26,000,000,000 

60.0 

161,700,000 

1,500,000,000 

Total  Gr. 

Debts  . . 

27,300,000,000 

215,000,000,000 

31.1 

1,070,000,000 

11,600,000,000 

Total  Net 

Debts  .. 

25,000,000,000  200,000,000,000 

Average  Interest 

Rate 

975,000,000 
3.9% 

11,000,000,000 

5.5% 

CHANGES  IN  PERCENTAGE  OF  GOLD  RESERVE  TO 
NOTE  ISSUES 

July,  1914  Nov.,  1918  Dec.,  1919 


Austria-Hungary  54.8  .7  .5 

France  62.0  11.2  9.6 

Germany  43.2  15.0  3.5 

Great  Britain  134.6  25.6  22.9 

Italy  70.0  9.8  7.5 

United  States  -99.6  63.2  52.3 


408 


The  Witness:  This  table  shows  the  extent  to  which 
notes  in  circulation  have  been  increased  in  the  greatest 
banking  institutions  in  the  world.  The  table  is  in  terms 
of  British  pounds  sterling  and  compares  the  notes  issued 
prior  to  the  war  with  those  in  issue  at  the  close  of  1919. 
Note  the  tremendous  increase  in  this  form  of  circulation 
and  then  note  the  very  small  comparative  increase  and 
actual  increase  in  the  amount  of  gold  holdings.  Prior 
to  the  war  the  leading  banks  of  these  great  commer- 
cial countries  had  1,252,000,000  notes  in  circulation;  in 
1919  they  had  7,069,000,000,  an  increase  of  £5,815,000,000 
during  that  period  of  only  five  years,  against  which  there 
was  a net  increase  of  gold  holdings  of  all  these  countries 
of  the  world  of  only  £358,000,000.  The  extent  of  the  in- 
flation is  evident  from  the  fact  that  the  face  value  of  the 
paper  currency  which  was  issued  during  the  four  years  of 
the  war  was  greater  than  the  value  of  all  the  gold  and  sil- 
ver produced  on  the  face  of  the  globe  from  the  period  of 
the  discovery  of  America  down  to  the  close  of  the  war. 

The  significance  of  that  statement  is  so  far-reaching 
that  it  is  difficult  for  the  imagination  to  grasp  it,  and  why 
such  a situation  should  not  completely  upset  the  basis 
of  all  interest  rates  and  cost  of  money  is  equally  beyond 
human  understanding.  It  never  has  occurred  before  in 
the  history  of  the  world  and  it  certainly  is  not  true  at  the 
present  time.  Under  these  conditions  it  is  natural  for 
prices  and  interest  rates  to  rise  and  for  business  to  ad- 
just itself  accordingly. 

Commissioner  Lucey : You  say  our  country  shows  the 
best  situation? 

A.  Yes,  decidedly;  and  our  situation  is  bad  as  com- 
pared with  1914,  but  compared  with  Europe  it  is  splendid, 
for  the  interest  rates  in  Europe  are  above  what  they  are 
in  this  country,  and  the  price  level  also  is  far  above  what 
it  is  in  this  country.  In  chart  No.  1 we  see  the  statistics 


409 


shown  ill  tliG  London  Statist  as  to  tho  pricG  IgvgI  Tvhich 
prevailed  in  April,  1919,  as  compared  with  the  price  level 
in  this  country.  It  is  far  beyond.  If  people  who  com- 
plain about  the  high  cost  of  living  in  this  country  would 
make  a comparison  of  what  the  price  level  is  in  Euro- 
pean countries  they  would  consider  this  a paradise  in 
comparison.  It  is  bad  here,  admittedly  bad,  but  the  con- 
dition which  has  brought  about  that  high  cost  of  living 
and  commodity  prices,  and  in  turn  a high  wage  level,  has 
also  brought  about  a high  cost  of  capital. 

That  situation  is  further  shown  by  a table  I have  here 
which  sets  forth  the  national  debts  before  the  war  and  the 
national  debts  of  the  great  countries  at  the  present  time, 
the  ratio  of  such  debts  to  public  wealth,  and  lastly  the  in- 
terest rate  and  the  amount  of  interest  which  each  of  these 
countries  must  now  pay. 

Whereupon  said  document,  so  marked  for  identi- 
fication ^‘Hagenah  Exhibit  6’’  is  hereby  made  a part 
of  the  record  in  this  case. 


Hagenah.  Exhibit  6 


NOTES  IN  CIRCULATION  OF  WORLD’S  GREATEST  BANKS 


Bank  of 

1919 

Pounds 

Sterling 

Prior  to  War 
Pounds 
Sterling 

Increase 

Pounds 

Sterling 

Increase  or 
Decrease  in 
Gold  Holdings 
Pounds 
Sterling 

Denmark  

. . . 25,312,000 

8,693,000 

16,619,000 

6,316,000 

England  

. . . 83.705,000 

29,317,000 

54,388,000 

46,082,000 

Currency  Notes  . . 

. ..  338,436,000 

338,436,000 

28,500,000 

Total  England  

. ..  422,141,000 

29,317,000 

392,824,000 

74,582,000 

Austria-Hungary  

...1,883,467,000 

88,740,000 

1,794,727,000 

—77,878,000 

Belgium  

...  187,718,000 

64,594,000 

123,124,000 

228,000 

France  

...1,471,977,000 

236,476,000 

1,235,501,000 

58,817,000 

Germany  

...1,489,205,000 

94,545,000 

1,394,660,000 

—7,831,000 

Holland  

. . . 84,648,000 

25,870,000 

58,778,000 

39,172,000 

Italy  

...  414,091,000 

66,445,000 

347,646,000 

—11,784,000 

Japan  

31,254,000 

71,567,000 

53,556,000 

Norway  

. . . 24,468,000 

6,658,000 

17,810,000 

5,269,000 

Spain  

. ..  151,676,000 

76,760,000 

74,916,000 

74,667,000 

Sweden  

, . . 39,540,000 

11,456,000 

28,084,000 

10,784,000 

Switzerland  

. . . 36.897,000 

10,716,000 

26,181,000 

11,730,000 

United  States 

(Federal  Reserve! 

500,985,000 

233,472,000 

120,456,000 

Total  

...7,068,418,000 

1,252,509,000 

5,815,909,000 

358,084,000 

Russia  

...1,836,217,000 

163,411,000 

1,672,806,000 

185,879,000 

410 


The  Witness:  In  1914  the  debt  of  these  seven  great 
countries  was  twenty-five  billion;  January  1,  1920,  it 
was  two  hundred  billion.  And  while  the  debt  in  some 
cases  is  from  44  to  60  per  cent,  of  the  total  national  wealth 
in  European  countries,  in  this  country  our  debt  as  com- 
pared with  1914  is  only  8.4  per  cent,  of  the  national 
wealth.  Our  interest  on  the  public  debt  in  1913  was 
$23,000,000  a year;  today  it  is  $1,100,000,000.  In  other 
words,  our  annual  interest  charge  now  is  $100,000,000  a 
year  more  than  our  total  national  debt  before  we  entered 
into  this  war.  The  average  rate  of  interest  being  paid  on 
these  government  war  debts  in  1913  was  3.9  per  cent. 
It  is  now  5.5  per  cent.,  and  every  one  of  these  issues  has 
suffered  a very  large  decline  in  its  market  value  because 
the  interest  rate  no  longer  reflects  the  purchasing  power 
and  the  actual  cost  of  money.  Our  own  Liberty  Bonds, 
regarded  as  the  highest  grade  security  in  the  world,  have 
declined  on  the  long  issues  from  12  to  15  per  cent,  and  the 
market  is  exceedingly  weak  at  the  present  time.  The 
actual  cost  of  money  for  the  government  today  is  54  per 
cent.,  and  this  on  treasury  certificates,  the  highest  rate 
ever  paid  in  our  history  except  the  darkest  days  of  the 
Civil  War;  and  when  the  government  is  paying  54  per 
cent,  for  its  money  as  compared  with  3 per  cent,  ten  years 
ago,  it  is  natural  that  the  private  corporations,  especially 
utilities,  cannot  exist  on  interest  rates  founded  on  eco- 
nomic conditions  prior  to  1914. 

At  the  bottom  of  this  same  table.  No.  6,  I show,  as 
further  bearing  on  the  subject  of  inflation  which  has 
taken  place,  the  changes  in  percentage  of  gold  reserve 
to  note  issues,  comparing  for  six  great  countries  the  ra- 
tio in  1914  to  1918,  and  then  at  the  close  of  1919.  Here 
the  United  States  makes  relatively  a good  showing,  but 
only  relatively  so.  In  the  absolute  the  showing  is  not 


411 


good  and  in  the  absolute  it  has  resulted  in  a high  interest 
rate  and  a high  price  level  which  must  necessarily  con- 
tinue for  a long  period  of  time. 

We  may  have  panics,  we  may  have  one  in  the  autumn 
of  this  year,  when  the  interest  rates  will  be  very  high 
superimposed  on  the  present  strained  credit  situation, 
but  the  rebound  will  be  very  quick,  quicker  than  it  was  in 
1907,  because  of  this  large  inflation,  this  immense 
amount  of  money  in  circulation.  The  war  has  resulted 
in  an  expansion  of  paper  currency  of  the  world  from 
seven  and  a quarter  billion  dollars  in  1914  to  nearly 
$40,000,000,000  in  November,  1918,  and  between  the  time 
when  the  armistice  was  signed  and  December,  1919,  there 
was  a further  expansion  of  $11,000,000,000,  and  the  rate 
of  expansion  for  the  first  four  months  of  1920  has  been 
almost  as  great  as  it  was  in  1919,  showing  that  the  credit 
situation  of  the  world  is  not  growing  better  and  that  in- 
terest rates  are  showing  no  tendency  to  decline,  but 
rather  to  remain  on  this  relatively  and  absolutely  high 
level. 

Chairman  Wilkerson:  From  where  did  you  compile 
this  last  table,  Mr.  Hagenah,  with  these  percentages? 

A.  That  was  taken  from  a publication  issued  by  the 
Mechanics  and  Metals  Bank  of  New  York  City  in  its  an- 
nual review  of  January,  1920. 

Q.  I was  wondering  wdiat  your  basis  was  for  deter- 
mining the  wealth  of  the  respective  countries.  Those 
percentages  are  significant  only  as  we  have  their  defini- 
tion of  wealth. 

A.  They  are  based  on  the  government  estimates  which 
are  obtained  in  the  files  of  the  Treasury  Department, 
and  while  they  are  not  published  down  to  1920  at  the 
present  time,  the  latest  figures  available  in  the  statistical 
abstract  are  of  1918,  but  I assume, — 


412 


Q.  The  situation  might  he  worse  than  it  is  here  de- 
picted. In  estimating  the  total  wealth,  credits  and  prop- 
erty, there  might  he  a duplication  of  real  value! 

A.  Yes;  hut  they  have  taken  fundamental  wealth, 
eliminating  all  duplications.  But  if  you  take  the  super- 
imposed credits  these  percentages  would  he  considerahly 
worse. 

So  far  I have  discussed  interest  rates  in  their  broadest 
significance.  I have  here  a chart  which  I have  compiled 
from  data  supplied  hy  Dow  & Jones  Company  of  New 
York,  financial  statisticians.  This  chart  shows  the  etfect 
on  interest  rates  in  the  United  States  of  these  conditions 
which  I have  discussed  as  particularly  world-wide. 

Whereupon  said  document,  so  marked  for  identi-  ‘ 
fication  ^‘Hagenah  Exhibit  7”  is  hereby  made  a part 
of  the  record  in  this  case. 


Hagenahi  Exhibit  7. 


W.J  Hagenah 


413 


The  Witness:  The  table  does  not  show  bond  quota- 
tions but  an  index  of  bond  prices  just  as  tables  1 and  2 
show  an  index  of  commodity  prices.  These  indices  have 
been  compiled  from  the  yields  of  average  prices  of  bonds 
for  each  day  of  the  month,  the  average  yield  for  the  bonds 
of  each  class  being  capitalized  at  4 per  cent,  to  get  the 
index.  The  comparison  of  these  indices  shows  the  rela- 
tive credit  of  the  different  groups. 

The  first  curve  at  the  top  of  the  table  is  a curve  of  the 
highest  grade  of  railroad  bonds,  those  which  have  been 
made  legal  for  savings  banks  by  large  investment  states 
of  this  country.  The  dotted  line,  which  is  the  second 
curve  at  the  left,  shows  the  second  grade  railroad  bonds, 
those  which  are  in  the  form  of  junior  issues.  The  solid 
line,  which  is  the  third  curve  beginning  at  the  left,  shows 
the  public  utility  issues,  and  the  fourth  line,  namely,  the 
dot  and  dash  line,  shows  the  industrial  bonds. 

This  table  extends  from  January,  1915,  by  months  to 
the  close  of  March,  1920.  Note  that  all  bond  prices  have 
tended  downward  for  the  reason  that  bonds  carr\^  fixed 
incomes,  and  as  money  has  been  expensive,  as  interest 
rates  have  been  high,  the  value  of  a bond  with  a 4 or  5 
per  cent,  income  per  year  is  less  because  the  purchasing 
power  is  reduced  in  terms  of  commodities,  labor  and 
other  investment  securities. 

The  significance  of  this  chart,  however,  is  not  in  the 
fact  that  all  bonds  have  tended  downward  but  that  some 
bonds  have  tended  downward  at  a different  rate  than 
others.  Industrial  bonds  have  tended  downward  the  least 
for  the  reason  that  the  industrial  companies  have  been 
able  to  adjust  their  credit  situation  by  increasing  prices 
whenever  commodities  and  labor  advance.  The  next  in 
the  order, — 


414 


Commissioner  Lucey:  I want  to  follow  that  indus- 
trial,— 

A.  The  ‘‘industrial  bonds’^  is  the  dot  and  dash  line 
which  is  the  lowest  in  1915  and  second  from  the  top  in 
1920. 

Q.  Well,  it  stays  normal  from  the  beginning  to  the 
end,  doesn’t  it? 

A.  Yes,  reflecting  their  ability  to  adapt  themselves 
to  changing  conditions  which  has  made  them  a very  desir- 
able form  of  security. 

Q.  It  has  been  fluctuating  during  these  years,  but  it 
has  gone  back  to  where  it  was  in  1915? 

A.  Showing  ability  to  get  back  to  its  foraier  level. 
There  has  been  a decline  in  the  index  of  the  average  in- 
dustrial bonds  of  only  6.2  per  cent.  Second  grade  rail- 
road bonds  which  were  already  low  in  1915  because  of  the 
coming  troubles  for  the  railroads  declined  further  only 
7.7  per  cent.  The  highest  grade  railroad  bonds,  those 
legal  for  savings  banks,  trust  funds  and  purchase  by  in- 
surance companies  declined  20  per  cent.,  while  public 
utility  bonds,  which  had  experienced  the  most  rapid 
growth  during  the  period  of  20  years  preceding  the  war, 
suffered  a decline  actually  of  over  25  per  cent,  in  the  in- 
dex figure. 

That  condition  is  shown  in  another  table  which,  instead 
of  showing  the  prices  at  which  the  bonds  sold  in  forms  of 
index  shows  the  changes  in  the  interest  rates  in  terms  of 
average  yield  of  bonds. 

Whereupon  said  document,  so  marked  for  identi- 
fication “Hagenah  Exhibit  8”  is  hereby  made  a part 
of  the  record  in  this  case. 


Hagenah  Exhibit  8. 

BOND  PR/CDS  I90/-/9ZO 

(T/?e  Sca/es  o/  y/a/ds  dee-n  Ini^erted  to  conform  #v///7  fhe  direcNon  of  Price  Mo\r6ments) 


supp//cd  t>y  SrooAmire  Economic  Service,  inc 


415 


The  Witness : The  data  for  this  table  have  been  sup- 
plied by  the  Brookmire  Economic  Service',  and  for  the 
purpose  of  making  comparison  the  table  is  inverted.  The 
scale  of  yields  is  so  shown  that  it  conforms  with  the  di- 
rection of  the  price  movement.  Here  again  we  notice 
that  the  industrial  bonds  have  been  able  to  weather  the 
storm  the  best  of  all  securities.  The  municipal  bonds 
have  been  able  to  weather  the  storm  because  they  have 
been  exempt  from  taxation.  The  railroad  bonds  have 
suffered  very  heavily,  and  again  public  utilities  have  suf- 
fered the  largest  decline. 

There  has  been  an  increase  in  the  average  yield  or  in- 
come on  industrial  bonds  of  eight-tenths  of  1 per  cent. 
Municipal  bonds  have  had  their  average  yield  increased 
1.35  per  cent.  On  railroad  bonds  the  yield  has  increased 
1.7  per  cent.,  while  on  public  utility  bonds  the  yield  has  in- 
creased 2.54  per  cent. 

It  is  of  greatest  significance  in  this  connection  that  the 
public  utility  bonds  used  in  this  table  are  bonds  of  very 
high  grades.  Most  of  the  public  utility  financing  during 
the  last  ten  years  has  not  been  in  the  fonn  of  first  mort- 
gages which  have  been  closed,  but  rather  in  junior  secur- 
ities on  w^hich  basis  of  financing  the  public  utility  industry 
must  most  largely  proceed.  The  decline  in  the  credit 
structure  and  the  increase  in  the  average  yield  has  been 
substantially  in  excess  of  24  per  cent.,  in  fact,  being  ap- 
proximately 3 per  cent,  on  the  class  of  securities  most 
frequently  issued. 

Rrior  to  1914  it  was  quite  generally  held  by  public  util- 
ity commissions  that  a return  of  7 per  cent,  and  in  some 
instances  8 per  cent,  on  the  fair  value  of  the  property 
was  not  unreasonable.  Stated  conversely,  it  was  often 
held  and  was  generally  construed,  that,  therefore,  a re- 
turn of  from  7 to  8 per  cent,  was  reasonable.  If,  during 


416 


the  last  five  years  because  of  this  complete  upset  in  eco- 
nomic conditions  the  actual  cost  of  money  has  risen  from 
2 to  3 per  cent.,  according  to  the  different  grades  of  util- 
ity sucurities,  over  and  above  the  level  which  prevailed 
when  these  authorities  stated  that  from  7 to  8 per  cent, 
was  a reasonable  return,  it  would  follow  that  without 
a very  exhaustive  investigation  the  utilities  could  be  given 
such  an  addition  to  what  was  considered  proper  in  pre- 
war days  as  will  recognize  these  added  costs  of  money 
which  have  since  developed.  Even  an  increase  in  the  rate 
of  return  to  approximately  9 or  9.5  per  cent,  would  not 
give  the  owners  of  the  property  an  income  of  the  same 
purchasing  power  as  these  authorities  were  ready  to  give 
them  prior  to  1914.  While  the  cost  of  money  has  there- 
fore risen  from  2 to  3 per  cent,  of  par  on  the  average 
public  utility  interest  bearing  security,  the  cost  of  money 
to  individual  utilities  because  of  local  or  extraordinary 
conditions  has  been  even  greater. 

It  is  of  interest  to  inquire  in  this  connection  that  since 
there  has  been  this  tremendous  increase  in  the  cost  of 
money,  whether  conditions  are  now  operative  which  will 
tend  to  keep  the  cost  of  money  high.  On  this  subject  it 
is  important  to  consider  the  present  demands  in  the 
money  market  with  which  the  public  utilities,  whose  de- 
mands for  money  are  now  very  urgent  because  of  the 
great  growth  of  the  cities,  must  compete. 

At  the  convention  in  the  close  of  1919  of  the  New  Eng- 
land Brick  Manufacturers  Association,  statistics  were 
compiled  showing  that  because  of  suspended  construction 
and  development  in  the  United  States  there  was  at  the 
close  of  1919  a shortage  of  1,300,000  residences  in  this 
country,  450,000  factory  buildings,  6,000  hotels,  5,000 
schools  and  public  institutions,  55,000  apartment  build- 
ings of  those  rated  as  average  and  large  size,  20,000 


417 


theaters,  churches  and  public  meeting  halls,  120  railroad 
terminals  complete  and  14,000  railroad  stations.  With 
this  demand  for  buildings  in  order  to  house  and  provide 
shelter  and  for  business  expansion,  it  can  readily  be 
seen  that  the  public  utilities  are  brought  face  to 
face  with  a demand  for  public  funds  which  is  of  stag- 
gering proportions.  At  the  same  time  the  demand  for 
funds  from  the  railroads  is  also  large.  The  statis- 
tics which  have  been  compiled  from  railroad  re- 
ports showing  the  amount  of  equipment  which  it  is 
necessary  for  the  railroads  to  have  in  order  to 
have  the  same  carrying  capacity  with  respect  to  the 
commerce  of  the  country  today  which  they  had  prior  to 
the  war  necessitate  a construction  during  the  next  three 
years  of  13,000  locomotives,  24,500  passenger,  baggage 
and  sleeping  cars  and  712,000  freight  cars.  The  budget 
of  the  railroads  for  reconstruction  and  expansion  to  the 
present  trade  situation  calls  for  from  $1,000,000,000  to 
$1,500,000,000  a year,  a sum  of  money  which  must  be  made 
and  obtained  in  the  open  market  in  which  the  public  utili- 
ties must  compete. 

This  demand  for  money  from  the  railroads  is  at  the 
present  time  well  under  way  and  it  is  interesting  to  note 
the  interest  rates  at  which  that  money  is  being  obtained 
by  the  strongest  railroad  systems.  The  following  rail- 
roads during  the  last  four  months  have  issued  securities 
at  from  7 to  74  per  cent,  to  the  investor  and  a cost  to  them 
of  from  to  over  8 per  cent,  as  the  actual  cost  of  the 
money.  I give  only  the  railroads  of  the  highest  credit 
standing.  New  York  Central,  Pennsylvania,  Delaware  & 
Hudson,  Northern  Pacific,  Union  Pacific,  and  such  great 
industrial  corporations  as  the  Western  Electric,  Texas 
Oil  and  Goodrich  Rubber  Company.  A large  number  of 
railroads  and  corporations  who  are  not  considered  of  the 


418 


highest  credit  standing  have  issued  securities  on  this 
level  of  interest  rates  or  higher  interest  rates  during  the 
last  four  months. 

Along  with  this  demand  for  money  from  private  indi- 
viduals for  homes  and  factories  and  from  the  transporta- 
tion industry  of  the  country  is  a great  demand  for  better 
roads  in  this  state  and  practically  every  state.  Hun- 
dreds of  counties  throughout  the  United  States  have  is- 
sued large  blocks  of  bonds  for  building  roads,  all  of  which 
have  been  thrown  on  the  market  and  caused  a decrease  in 
the  price  of  municipal  securities  so  that  the  yield  from 
that  class  of  tax  exempt  bonds  has  been  increased  1.35  per 
cent,  per  year.  At  the  same  time  there  is  no  evidence  of  a 
lowering  in  our  public  taxation.  There  is  now  a treasury 
deficit  of  over  $5,000,000,000  and  the  government  expend- 
itures are  running  in  excess  of  revenue.  This  condition 
of  government  extravagance,  of  public  extravagance  ev- 
erywhere and  of  individual  extravagance,  is  reflected  in 
the  high  tax  rate  and  the  low  yield  of  securities  and, 
therefore,  the  high  money  rate.  The  inability  of  business 
to  adapt  itself  quickly  to  these  changed  conditions  makes 
it  impossible  for  interest  rates  to  quickly  return  to  the 
normal.  Hundreds  of  thousands  of  men  are  still  in  some 
form  of  military  service.  "While  large  numbers  have  been 
demobilized,  they  have  not  yet  gone  back  to  the  centers 
of  employment  and  residences  from  which  they  were 
taken  by  the  government,  and  until  they  are  returned  to 
the  factories  and  smaller  cities  and  homes,  the  demobili- 
zation process  is  not  complete. 

We  have  lost  hundreds  of  thousands  of  laborers 
through  emigration;  we  are  receiving  no  satisfactory 
immigrants  from  Europe.  There  are  methods  on  foot 
in  European  countries  to  prevent  the  leaving  of  their 
best  class  of  citizens.  There  are  movements  in  this  coun- 


419 


try  to  prevent  their  entrance  even  if  they  want  to  come, 
and  under  those  conditions  we  have  a complete  upset  of 
industrial  relations. 

Because  of  these  situations,  which  are  world-wide  in 
their  significance,  all  of  which  are  present  in  various  de- 
grees in  the  United  States,  we  have  today  the  highest 
level  of  prices,  the  highest  level  of  wages  and  the  highest 
level  of  interest  rates  which  have  prevailed  with  possi- 
bly one  or  two  exceptions  during  the  Civil  War  in  the  en- 
tire history  of  the  country.  The  entire  basis  on  which 
the  public  utility  was  constructed,  operated  and  financed 
prior  to  1914  has  been  upset,  the  credit  situation  is  dis- 
turbed, and  according  to  the  fundamental  conditions  as 
they  now  exist  and  are  still  developing  and  based  on  the 
experience  of  readjustment  following  other  wars,  unless 
there  is  substantial  provision  made  for  increased  rate  of 
return  to  public  utility  properties  and  they  thereby  be 
permitted  to  adapt  themselves  to  these  changing  condi- 
tions as  other  industries  are  with  which  they  must  com- 
pete in  the  open  market,  the  public  utility  industry  can- 
not meet  the  demands  for  service  from  the  public  and 
will  cease  to  function  as  a necessary  institution  in  pub- 
lic and  private  life. 

Commissioner  Lucey:  Is  this  condition,  Mr.  Hage- 
nah,  at  all  local  to  Illinois  ? 

A.  No,  sir;  it  is  nation-wide.  The  situation  from 
which  these  public  utilities  are  suffering  in  Illinois  is  sub- 
stantially the  same  from  which  they  are  suffering  every- 
where. 

Q.  Then  what  you  say  in  your  testimony  here  is  ap- 
plicable to  the  country  at  large? 

A.  It  is,  modified  in  this  respect,  that  those  cities  and 
those  states  in  which  population  has  grown  more  rapidly 


420 


the  situation  is  aggravated.  Where  cities  have  grown 
slowly  and  utilities  are  not  face  to  face  with  very  urgent 
demands  for  expanding  their  plants  they  can  probably 
struggle  along  for  some  time  with  minimum  financial  re- 
quirements, but  in  a state  like  Illinois,  which  has  shown  a 
very  large  increase  in  wealth  and  population  for  prac- 
tically every  city  for  which  census  statistics  have  been 
published,  in  which  there  is  a consequent  shortage  of  util- 
ity facilities,  the  public  demands  cannot  be  met  until 
money  so  invested  receives  the  same  wages  based  on  this 
level  of  prices  as  labor  is  receiving  and  as  being  paid  for 
commodities  entering  into  construction  expenses  and  op- 
erating expenses. 

Q.  But  where  is  the  stop,  where  is  the  period  to  be, 
if  the  utility  has  got  to  go  into  the  open  market  and  com- 
pete with  these  industrials  who  have  no  regulation  for 
money?  There  isn’t  anything  to  prevent  one  of  the  big 
industrial  corporations  from  paying  10  or  12  per  cent. 
Do  we  have  to  keep  up  with  that  procession? 

A.  No;  because  the  economics  of  that  will  adjust  it 
and  is  beginning  to  adjust  it  now.  The  great  demand 

for  money  and  the  ability  to  pay  these  high  money  costs 
grew  out  of  the  extravagant  prices  for  munitions  and 
for  luxuries  during  the  war  and  following  the 
war.  Whatever  cost  they  had  to  pay  for  money  they 
added  to  the  price  of  the  goods.  Either  the  govern- 
ment paid  it  when  it  got  the  goods  or  individuals  have 
paid  it  for  luxuries  and  extravagances.  There  is  now  a 
turn  in  those  conditions.  Cancellations  are  being  report- 
ed by  many  concerns.  The  strike  situation  has  so  re- 
duced production  and  has  so  put  fear  and  caution  into  the 
public  that  the  wild,  extravagant  buying  which  was  so 
marked  for  the  last  year  is  beginning  to  subside.  The 
day  of  caution  is  here.  Many  industries  are  planning 


421 


retrenchments.  Leading  New  England  textile  mills  are 
now  operating  only  four  days  a week.  Many  automobile 
companies  have  reduced  the  number  of  their  employes 
from  10  to  20  per  cent.  There  is  comparatively  little  holi- 
day and  overtime  work  being  done  in  factories.  In  some 
cities  there  is  beginning  to  be  talk  of  unemployment.  As 
the  industrial  pace  is  slackened  bank  loans  will  be  re^ 
duced.  Stocks  of  goods  in  warehouses  are  being  liquidat- 
ed. This  is  being  brought  about  through  the  efforts  of 
the  Federal  Reserve  banks  in  advancing  discount  rates. 

With  the  curtailment  of  orders  from  the  public,  manu- 
facturing companies  will  be  less  disposed  and  less  able 
to  pay  high  rates  for  loan  accommodations,  and  interest 
rates  should  decline  with  this  deflation  of  the  loan  account 
until  we  meet  the  large  seasonal  demand  for  money  in 
November.  Wliile  these  conditions  justify  the  belief  that 
the  willingness  to  pay  high  interest  rates  on  the  part  of 
prosperous  industrial  companies  is  practically  at  an  end, 
it  does  not  mean  that  public  utilities  will  be  able  to  bor- 
row as  cheaply  as  they  did  in  1914.  The  public  has  for 
the  time  being  lost  faith  in  utility  investments  and  capital 
can  be  secured  for  this  industry  only  by  offering  an  at- 
tractive yield. 

The  interest  rates  for  public  utilities  will  probably  be 
very  high  for  another  year  and  then  will  gradually  tend 
downward,  for  we  are  undoubtedly  being  brought  face  to 
face  with  an  industrial  depression  of  some  considerable 
severity.  We  will  hear  much  more  about  that  in  60  days 
than  is  public  at  the  present  time.  For  the  next  year  and 
possibly  two  years  the  public  utility  situation  will  be  urg- 
ent, but  for  practically  a decade  the  interest  rates  on  pub- 
lic utilities  must  be  on  a much  higher  level  than  they  were 
prior  to  1914. 


422 


Commissioner  Lucey:  Is  the  only  remedy  which  you 
have  in  mind  the  increase  in  the  rate  of  return? 

A.  I can  see  no  other  remedy  which  would  go  far 
enough  to  correct  the  situation.  The  saturation  of  the 
territory  which  has  been  under  way  during  the  last  three 
or  four  years  has  had  a very  marked  and  beneficial  effect 
which  would  be  more  noticeable  if  we  had  not  had  this 
tremendous  increase  in  prices  during  the  same  period. 
It  has  been  lost  in  the  violent  change  in  prices.  It  will 
become  manifest  more  in  two  or  three  years  if  things  set- 
tle down  to  the  normal  process  of  readjustment  which, 
however,  will  be  drawn  out  over  a long  period  of  years. 

Chairman  Wilkerson : Does  this  probability  of  a high 
range  of  prices  for  a great  many  years  have  anything  to 
do  in  your  opinion  with  the  extent  of  the  consideration 
which  should  be  given  to  present  prices  in  valuing  prop- 
erties for  rate  making  purposes? 

A.  Yes ; I think  the  Commission  should  take  the  pres- 
ent price  level  into  consideration.  I would  not  go  so  far 
as  to  say  that  the  sole  evidence  of  present  value  was  the 
price  level  which  prevails  at  the  present  time,  because 
to  some  extent  we  all  admit  that  is  abnormal  and  brought 
about  by  war  conditions.  The  utility  situation  today  com- 
pared with  that  of  1914  is  revolutionary.  For  over  15 
years  before  the  opening  of  the  late  war  prices  moved 
through  more  or  less  well  defined  cycles  of  from  four  to 
six  years.  Under  those  conditions  it  was  entirely  proper 
for  commissions  to  base  appraisals  on  the  five-year  aver- 
age of  labor  and  material  prices.  Even  though  the  trend 
of  prices  during  this  period  was  steadily  upward,  the 
utilities  were  expanding  their  business  and  instituting 
economies  on  so  large  a scale  that  these  economies  readily 
absorbed  the  increased  operating  expenses  resulting  from 
the  rising  trend  of  prices.  At  the  present  time,  however. 


423 


conditions  are  not  comparable  with  those  prior  to  1914, 
and  it  is  therefore  difficult  to  see  how  an  average  of  pre- 
war prices  can  reflect  the  fair  value  of  any  property  at 
the  present  time. 

Court  decisions  say  that  the  actual  cost  of  the  property 
shall  be  taken  into  consideration,  but  these  decisions  were 
announced  at  a time  when  there  was  no  great  ditference 
between  original  cost  and  reproduction  cost  new.  I be- 
lieve the  present  price  level  will  not  be  long  maintained 
since  the  definite  change  in  the  trend  is  apparently  near 
at  hand.  The  present  price  level  is  to  me  a matter  of 
greater  significance  than  an  average  of  pre-war  prices  or 
the  original  cost  of  the  property,  and  while  I would  not 
base  an  appraisal  entirely  on  present  day  prices,  I would 
give  considerable  weight  to  them.  If,  however,  original 
cost  is  to  be  considered  in  making  valuations  today,  I 
would  say  that  the  present  price  level  is  entitled  to  much 
greater  consideration. 

The  machinery  of  regulation  moves  slowly.  Values 
should  not  be  increased  or  reduced  because  of  any  single 
important  advance  or  decline  in  prices.  The  commission 
should  attach  greater  weight  to  the  average  of  such  move- 
ments and  the  well  established  trend.  Under  the  trend 
which  has  developed  and  been  in  operation  for  a number 
of  years  the  pre-war  cost  data  are  of  relatively  small  im- 
portance. We  cannot  compare  such  costs  with  present 
day  prices  because  the  yard  stick  of  measurement  is  ma- 
terially changed,  for  we  are  dealing  with  a new  kind  of 
dollar.  It  means  little  from  a valuation  standpoint  today 
to  say  that  a certain  piece  of  property  cost  $100,000  ten 
years  ago  and  therefore  such  amount  should  be  given 
great  weight  in  determining  its  value  today.  All  forms 
of  business  are  trying  to  adjust  themselves  in  the  free 
play  of  economic  forces  to  these  new  conditions  and  if 


424 


the  public  utility  industry  is  to  be  held  down  by  an  ar- 
bitrary pinning  to  historical  conditions  it  must  naturally 
through  the  economic  forces  which  no  commission  can 
control,  be  working  to  a position  where  it  will  wholly  fail 
to  meet  the  public  necessities  and  the  public  will  be  denied 
the  value  of  those  services  which  are  not  luxuries  but  ab- 
solute necessities  to  metropolitan  life. 

Q.  In  other  words,  it  is  your  view  that  the  more  logical 
remedy  is  one  in  which  the  effect  of  these  conditions  is  re- 
flected in  the  rate  of  return  to  be  fixed  rather  than  in  a 
large  increase  in  the  valuation  which  is  placed  upon  the 
property  of  the  utility? 

A.  I would  not  quite  agree  with  that.  I think  that,  if 
I understand  your  question, — 

Q.  Well,  I am  asking  you, — 

A.  It  is  rather  a broad  one. 

Q.  These  conditions  to  which  you  have  referred,  if- 
I make  myself  clear,  affect  two  questions  which  are  be- 
fore the  Commission? 

A.  Yes. 

Q.  As  you  know  in  every  case. 

A.  Values  and  costs. 

Q.  The  first  thing  which  the  Commission  must  do  is 
to  place  upon  the  property  of  the  utility  a fair  value  at 
the  time  it  is  employed  in  the  public  service.  The  next 
thing  is  to  allow  a fair  rate  of  return  upon  that  fair  value. 
Now,  obviously  these  conditions  to  which  you  have  re- 
ferred have  affected  one  of  the  elements  which  the  courts 
say  must  be  given  some  consideration. 

A.  Yes. 

Q.  In  determining  the  fair  value  of  the  property  and 
the  cost  to  reproduce  the  property? 


425 


A.  Yes. 

Q.  The  elements  also  affect  the  other  question,  name- 
ly, the  rate  of  return  which  is  to  be  allowed? 

A.  Yes. 

Q.  I ani  asking  you  what  your  view  is  as  to  whether 
or  not  the  etf  ect  of  these  conditions  should  be  shown  in  the 
orders  to  be  made  by  the  Commission  in  allowing  a higher 
rate  of  return  or  in  placing  a large  valuation  on  the  prop- 
erty which  reflects  to  a very  great  extent  present  costs? 

A.  I think  that  would  be  a rather  dangerous  way  to 
recognize  the  present  situation.  What  constitutes  a rea- 
sonable rate  of  return  is  an  economic  question  wholly 
apart  from  the  appraisal.  What  is  a fair  value  of  the 
property  in  terms  of  those  forces  which  make  for  value 
is  quite  different  from  the  question  of  what  is  a reason- 
able rate  of  return.  I donT  believe  that  the  valuation 
should  be  increased  or  reduced  because  of  any  corre- 
sponding change  in  the  rate  of  return,  nor  should  the 
rate  of  return  be  made  to  reflect  changes  in  economic 
conditions  which  are  not  at  the  same  time  recognized  as 
affecting  the  question  of  value. 

We  live  in  a new  era,  a new  economic  epoch,  and  just 
as  commissions  found  fair  values  of  property  on  the  basis 
of  conditions  as  they  were  known  to  exist  prior  to  1914 
and  found  what  was  then  a reasonable  rate  of  return  each 
without  special  consideration  of  the  other,  so  in  this  epoch 
in  which  we  now  live,  the  forces  of  which  are  making  for 
values  and  costs,  the  Commission  should  find  the  fair 
value  of  the  property  from  a consideration  of  the  cost 
to  the  extent  that  the  law  requires  it  to  be  considered  and 
the  reproduction  cost  new  over  a reasonable  period  and 
then  should  consider  the  cost  of  money  which  the  com- 
pany has  to  pay,  so  that  the  cost  of  money  and  the  value 


426 


will  be  expressed  in  the  medium  of  exchange  and  on  the 
basis  of  values  as  they  are  found  in  economic  conditions 
which  exist  today.  There  should  be  just  as  much  inde- 
pendence between  those  two  factors  today  as  there  was 
prior  to  1914.  To  some  extent  that  increases  the  value 
and  increases  the  rate  of  return  on  the  value. 

Q.  I think  my  question  resolves  itself  into  this, — ^the 
extent  to  which  these  increased  prices  are  to  be  given 
consideration  in  arriving  at  a conclusion  as  to  what  is 
the  fair  value  of  the  property.  Now,  during  the  period 
before  the  late  war  that  was  largely  a theoretical  matter ; 
there  was  not  very  much  difference  between  the  original 
cost  of  the  property  and  the  cost  to  reproduce  it;  in  the 
prices  between  1904  and  1914  there  was  not  that  wide  dif- 
ference. 

A.  In  some  cases  there  was  no  wide  difference. 

Q.  It  was  largely, — 

A.  Because  the  great  growth  of  utilities  came  at  the 
time  of  advancing  prices  and  their  costs  would  prac- 
tically reflect  the  then  prevailing  price  level.  In  individ- 
ual cases  there  was  quite  a large  difference. 

Q.  Yes,  but  for  a period  of  ten  years,  during  that 
period  from  1904  to  1914,  there  was  not  a radical  differ- 
ence? 

A.  Not  a radical  difference,  no. 

Q.  But  now  you  have  radical  differences, — 

A.  Yes,  sir,  decidedly. 

Q.  — in  price  levels.  The  courts  say  consideration 
must  be  given  to  the  original  cost  and  to  the  cost  to  repro- 
duce, without  indicating  just  what  consideration  is  to  be 
given  to  each  one,  whether  one  is  to  have  80  per  cent,  con- 
sideration and  the  other  20  or  one  50  and  the  other  50. 

A.  That  is  a matter  for  the  judgment  of  the  court. 


427 


Q.  They  say  it  is  a matter  of  judgment  for  the  com- 
missions and  for  the  courts;  but  having  in  mind  the  fact 
that  in  all  probability  the  trend  in  prices  will  begin  to  be 
downward,  would  you  say  that  in  determining  the  rate  of 
return  which  is  to  be  allowed,  for  instance,  for  the  year 
1920  or  1921,  any  greater  consideration  was  to  be  given 
to  the  present  abnormal  conditions  than  is  to  be  given  in 
valuing  the  property  where  you  are  endeavoring  to  in- 
ject into  the  solution  the  effect  for  a number  of  years  to 
come  of  the  high  scale  of  prices? 

A.  Yes,  I think  you  should  because  the  money  rate 
is  much  more  sensitive  and  responds  much  quicker  to  the 
demands  than  property  values.  They  swing  more  slowly. 

Q.  That  is,  we  might  be  justified  in  giving  full  effect 
or  substantially  full  effect  to  these  abnormal  conditions 
temporarily? 

A.  Yes,  sir. 

Q.  A high  rate  of  return? 

A.  Yes. 

Q.  Whereas,  we  would  not  be  justified  in  giving  full 
effect  to  the  price  of  today  in  placing  a double  valuation 
on  the  property? 

A.  I think  that  is  true.  It  would  be, — in  fact  very  few 
utilities  would  be  able  to  earn  the  present  cost  of  money 
on  the  property  capitalized  on  the  present  level  of 
prices.  That  is  impossible. 

Q.  That  is  a theoretical  question. 

A.  Prices  have  been  rising  for  a long  time  and  give 
no  indications,  so  far  as  the  basic  commodities  are  con- 
cerned, of  soon  returning  to  the  pre-war  level,  but  in  a 
historical  sense  we  know  they  must  and  eventually  will 
return  definitely  from  the  present  level.  For  this  reason 


428 


there  is  some  justice  in  using  the  average  of  prices  if 
such  average  is  extended  to  include  the  large  increases 
which  have  more  recently  developed.  It  should  not  be 
extended  so  far  into  the  past  as  to  enable  the  low  prices 
over  a long  period  of  years  prior  to  1914  to  outweigh  the 
increases  which  are  now  concrete  facts.  There  is  con- 
siderable merit  in  a valuation  on  the  basis  of  1916  or  1917 
prices,  for  that  basis  is  substantially  in  excess  of  pre- 
war prices,  but  is  very  much  below  the  present  level  and 
may  be  a fair  estimate  of  the  average  price  level  for  the 
next  ten-year  period.  This  of  course  is  problematical, 
for  it  may  easily  be  atfected  one  way  or  another,  at  least 
temporarily,  by  extraordinary  developments. 

Where,  however,  the  utility  has  made  large  additions 
to  its  plant  during  the  war  period  and  had  to  meet  the 
war  prices  then  prevailing,  I think  it  should  be  given  the 
benefit  of  such  actual  costs.  Those  expenditures  were 
matters  of  public  necessity  and  I think  the  public  should 
bear  them  until  they  have  been  consumed  in  service  or 
the  excess  cost  amortized.  There  are  always  a great 
many  local  conditions  which  can  modify  any  general  rule, 
but  in  fixing  the  basis  for  a rate  case  I would  be  opposed 
to  giving  serious  weight  to  costs  or  prices  prior  to  1914 
to  the  exclusion  of  evidence  as  to  the  present  costs.  These 
pre-war  prices  and  original  cost  data  represent  a ditfer- 
ent  economic  period,  and  unless  we  can  meet  the  condi- 
tions as  they  are  today  there  will  be  no  further  invest- 
ment money  available  for  public  utilities. 

The  rate  of  return,  however,  is  a far  more  sensitive 
matter  and  is  subject  to  very  frequent  changes.  Nothing 
would  be  gained  by  trying  to  average  interest  rates  at  a 
time  like  this. 

The  Commission  is  in  this  admirable  situation,  that  it 


429 


can  protect  the  public  and  the  investors  by  reason  of  the 
fact  that  it  is  a permanent  body.  It  has  authority  to  open 
a case  on  its  own  motion,  to  institute  an  investigation  on 
its  own  motion,  and  while  it  must  grant  higher  interest 
rates  and  grant  higher  rates  to  meet  expensive  labor  con- 
ditions, it  is  a permanent  body,  and  as  long  as  that  condi- 
tion prevails  they  can  see  that  the  public  utility  is  pro- 
tected and  when  a lower  price  level  is  established  they 
can  act  for  the  benefit  of  the  public  as  then  seems  advis- 
able. Therein  is  the  great  value  of  the  public  utility  com- 
mission, that  it  is  a continuing  body. 

Q.  Why  I asked  you  that  question, — it  seemed  to  be 
an  easy  task  for  a commission  to  give  effect  to  these  ele- 
ments in  awarding  a rate  of  return  in  which  they  would 
be  reflected,  but  under  the  present  extraordinary  condi- 
tions having  in  mind  the  uncertainty  as  to  the  length  of 
time  during  which  the  effect  of  the  war  will  be  projected 
and  having  in  mind  the  fact  that  if  you  want  to  repro- 
duce a utility  today  at  all,  you  couldn’t  reproduce  it, — 

A.  You  can’t  do  it. 

Q.  — it  would  seem  to  be  a very  difficult  task  for  any- 
one to  undertake  to  assign  to  the  property  of  any  utility 
a fair  value  as  of  today. 

A.  Yes,  I would  agree  with  you  there. 

Q.  It  seems  almost  impossible  to  do  it. 

A.  Yes,  I would  agree  with  you  that  for  rate  making 
purposes  I don’t  think  that  the  present  level  of  prices  is 
the  controlling  factor. 

Q.  And  it  is  just  a guess  to  attempt  to  arrive  at  a 
conclusion  as  to  the  extent  to  which  effect  is  to  be  given 
to  it? 

A.  Yes,  but  I do  think  that  it  should  be  considered, 


and  is  probably  of  just  as  much  significance  and  maybe 
more  than  the  price  level  that  prevailed  prior  to  1914. 

Q.  It  probably  has  more  significance  than  the  prices 
in  1904. 

A.  Yes. 

Q.  Because  we  had  an  upheaval  in  between? 

A.  Yes.  I don’t  think  that  any  economist  would  say 
that  the  price  level  as  of  the  spring  of  1920  was  a per- 
manent level  because  there  are  forces  working  today  that 
are  going  to  correct  it,  just  as  they  always  do  in  the  eco- 
nomic play  of  forces.  Prices  must  tend  downward  be- 
fore long  and  there  is  evidence  that  these  forces  are  now 
at  work  to  bring  this  about.  The  provision  you  make  for 
rate  of  return  should  recognize  the  cost  of  money  at  the 
present  time  because  our  national  credit  structure  is  still 
very  much  inflated  and  under  a great  strain.  The  value 
of  the  property  may  be  founded  on  more  stable  condi- 
tions, such  as  prices  averaged  over  a period  which  will 
recognize  the  new  cost  level  which  now  prevails  and  is 
likely  to  prevail  for  some  period  in  the  future.  This  is 
no  more  than  applying  general  business  principles  to  the 
public  utility  industry. 

Q.  Do  you  think,  then,  that  justice  would  be  done  and 
the  necessities  of  the  situation  would  be  met  if  conserva- 
tism were  used  when  it  came  to  valuing  properties  and 
liberality  were  used  in  connection  with  the  rate  of  return? 

A.  Well,  conservatism  and  liberality  are  both  within 
that  range  where  the  Commission  has  the  right  to  vary. 

Q.  That  is,  the  exercise  of  discretion  where  discre- 
tion may  be  used? 

A.  Yes. 

Q.  What  I mean  is,  if  there  would  be  some  hesitation 
about  adopting  these  high  reproduction  values. 


431 


A.  If  you  are  going  to  be  conservative  anywhere  I 
would  rather  be  conservative  on  the  valuation  than  the 
rate  of  return.  As  already  explained,  interest  rates  are 
more  sensitive  than  commodity  prices  generally,  for  which 
reason  the  value  can  safely  be  based  on  an  average  of 
prices.  It  is  important,  however,  in  determining  the 
period  over  which- the  prices  are  to  be  averaged  that  the 
owner  of  the  property  shall  not  be  deprived  of  the  un- 
earned increment  which  has  been  the  principal  induce- 
ment in  many  of  our  great  development  undertakings. 
If  a plan  is  to  be  adopted  whereby  the  owner  is  to  be  de- 
prived of  this  unearned  increment,  while  such  increment 
is  granted  to  other  forms  of  investment,  it  would  be  rather 
imprudent  from  an  investment  standpoint  for  a man  to 
place  his  money  in  public  utilities,  and  investors  would 
soon  discover  that  fact. 

Q.  To  put  a simple  illustration,  here  is  a question 
that  we  have  and  all  commissions  have  now  in  literally 
hundreds  of  cases, — 

A.  Yes. 

Q.  The  question  is  presented.  Let  us  take  the  historic 
cost,  call  it  back  in  1904  or  1905,  whenever  that  property 
and  isn’t  that  dependent  upon  the  probability  with  ref- 
happened  to  be  constructed, — suppose  we  have  in  the  rec- 
ord evidence  that  on  the  basis  of  prices  in  1916,  or  an 
average  price  from  1912  to  1917,  the  cost  of  the  property 
would  be  a million  dollars  for  illustration,  and  we  have 
evidence  in  the  record  that  on  that  basis  of  prices  for 
sometime  in  1919  it  cost  two  million  dollars,  and  on  a 
record  of  that  kind  the  question  was  put  up  as  to  the 
value  which  was  to  be  assigned  to  that  property  for  rate 
making  purposes,  and  the  question  is  the  extent  to  which 
the  prices  of  1919  are  to  be  given  consideration,  admitting 


432 


now  that  some  consideration  is  to  be  given  to  them,  be- 
cause the  courts  say  that  some  consideration  shall  be 
given  to  them, — how  much  consideration  shall  we  give 
erence  to  the  duration  of  this  period  of  high  prices  ? 

A.  That  is  true. 

Q.  And  in  order  to  determine  how  much  weight  we 
must  give  to  it  we  must  arrive  at  a conclusion  along  the 
line  as  to  the  probability  of  the  extent  and  duration  of 
the  high  scale  of  prices? 

A.  Yes,  if  you  think  that  prices  are  going  to  decline 
very  rapidly  after  the  first  of  June  then  you  would  be 
justified  in  not  attaching  any  very  great  consideration  to 
the  price  level  of  May,  1920.  But  if  you  were  going 
to  follow  economic  and  financial  history  on  the  basis  that 
the  future  may  be  judged  from  what  has  happened  every 
time  in  the  past  when  the  same  forces  were  at  work  which 
are  operative  now,  you  would  probably  not  say  that  the 
price  level  of  May,  1920,  is  the  one  to  be  considered  but 
an  average  of  several  years  prior  to  that  time,  which 
will  probably  reflect  the  average  prices  for  four  or  five 
years  in  the  future.  If  it  developed  subsequently  that  an 
error  had  been  made,  the  commission  with  its  present 
powers  could  promptly  correct  it. 

Q.  Would  you  say  as  the  result  of  your  studies,  look- 
ing forward  for  a period  of  10  years,  at  least  50  per 
cent,  of  the  effect  of  this  abnormal  increase  in  prices  will 
persist? 

A.  I think  so.  I think  that  is  perfectly  safe  from  the 
history  of  the  past  in  England  and  this  country.  Individ- 
ual cases  will  be  greater  than  that.  For  instance,  food 
prices  are  going  to  be  higher  next  year  than  this  year. 
Labor  prices  will  in  some  industries  tend  downward  and 
in  some  others  they  must  necessarily  be  high  because 


433 


they  must  earn  enough  to  buy  their  food  and  clothing  at 
the  prevailing  prices.  Many  industries  like  the  automo- 
bile concerns  and  automobile  accessories  will  experience  a 
sharp  decline  in  their  business  before  very  long.  The 
cotton  and  woolen  business,  the  shoe  industry,  the  mill- 
ing business  and  the  lumbering  industry  and  iron  and 
steel  will  remain  very  active.  The  average  level  of  wages 
will  probably  not  go  down  for  10  years.  Judging  by  the 
period  following  the  Civil  War,  wages  will  remain  on  a 
relatively  high  level  for  a considerable  period  of  years. 
In  fact,  such  level  will  probably  be  retained  until  we 
have  a severe  and  long  drawn  out  business  depression,  of 
the  early  coming  of  which  there  is  as  yet  no  evidence. 

Commissioner  Lucey : Of  course,  as  long  as  wages  stay 
high  and  the  returns  in  the  industrial  field  remain  as 
much  as  they  are  now,  whatever  the  ultimate  cost  of  the 
product  may  be,  if  there  is  a lot  of  money  coming  in, 
these  increases  will  not  attract  the  attention  that  they 
will  attract  when  labor  prices  go  down  or  whether  as 
the  result  of  an  industrial  depression  men  are  out  of  em- 
ployment and  are  unable  to  secure  it.  If  under  those 
circumstances  from  a restriction  of  the  credit  circulation 
money  remains  as  valuable  as  it  is  today  the  utility  will 
require  virtually  the  same  rate  of  return  to  keep  step  with 
the  restricted  value  of  the  money.  The  necessity  of  the 
increased  prices  on  utilities  especially  in  the  large  cities, 
it  seems  to  me,  is  going  to  produce  a decided  industrial 
disturbance.  For  instance,  take  a city  like  New  York. 
While  the  street  car  rates  may  be  eight  cents  there  in 
New  York,  while  men  are  making  five  or  six  or  seven  or 
ten  dollars  a day  they  won’t  pay  any  attention  to  the 
fact  that  the  rate  has  gone  up  from  five  to  eight  cents 
on  the  street  cars. 

A.  That  is  true. 


434 


Q.  But  if  those  men  are  out  of  work  and  can’t  get 
their  seven  or  eight  dollars  per  day  or  any  other  price 
per  day,  won’t  they  watch  those  street  cars  go  by  and* 
think  of  the  day  when  they  paid  only  five  cents  and  be  dis- 
satisfied with  paying  eight? 

A.  Before  they  do  that  they  will  think  of  the  thousands 
of  dollars  thrown  away  on  non-essentials  during  the 
past  few  years ; but  there  is  nothing  to  indicate  that 'wages 
are  going  down.  There  is  going  to  be  a shifting  of  em- 
ployment. Those  men  will  be  thrown  out  of  employment 
where  they  are  engaged  in  luxury  industries.  There  is  a 
demand  for  labor  on  the  small  farms  and  in  the  small 
cities  which  runs  into  the  thousands  simply  because  the 
whole  labor  structure  of  the  country  was  upset  by  war 
conditions.  The  great  bulk  of  the  labor  is  in  the  wrong 
place,  and  the  only  way  to  get  them  to  go  back  again 
where  they  economically  and  socially  belong  is  to  make 
it  impossible  through  these  economic  forces  to  employ 
them  in  the  luxury  industries  where  they  are  an  over- 
head expense  on  the  whole  public.  And  if  they  are  out 
of  employment  and  have  no  income  in  the  large  cities 
but  income  enough  awaits  them  in  the  small  cities,  they 
will  in  the  course  of  a year  or  two  years  gradually  go 
back,  and  the  movement  of  population  before  long  will  be 
away  from  the  large  manufacturing  centers,  back  to  the 
small  towns  and  the  farms.  Those  who  are  still  working 
in  the  large  cities  will  continue  to  draw  large  pay,  and 
at  the  same  time  will  greatly  increase  their  efficiency  in 
order  to  retain  their  positions.  Wlien  street  railway 
costs  are  reduced,  the  reduction  in  street  car  fares  may 
also  be  expected.  Such  reduction,  however,  should  not 
be  made  merely  because  of  complaints  which  are  not  justi- 
fied by  the  facts. 

Q.  Has  there  ever  been  any  return  of  what  population 


435 


lias  Hocked  to  the  large  centers  for  industrial  ^rea- 
sons, has  there  ever  been  any  record  of  any  return  to 
the  rural  sections  and  the  smaller  cities? 

A.  Not  in  the  United  States  because  this  country  is 
still  too  new,  unsettled  and  undeveloped  economically. 
That  has  been  true  in  several  European  centers  where  . 
there  are  several  well  marked  movements.  Those  swings 
come  probably  only  once  in  a century.  We  are  experienc- 
ing it  now.  Our  cities  are  over-developed  as  compared 
with  the  farms.  We  will  have  an  acute  shortage  of  food 
products  according  to  all  indications  this  fall,  because 
there  is  not  enough  labor  to  produce, — there  are  not 
enough  acres  being  put  under  production,  there  are  not 
enough  men  and  we  have  an  excess  supply  in  the  cities. 

The  best  way  to  bring  them  back  is  through  the  play 
of  economic  forces.  The  community  which  can  offer  em- 
ployment and  food  will  take  men  from  the  larger  com- 
munities which  can  not.  Just  as  the  cities  took  the  men 
away  from  the  country,  so  the  country  will  now  have 
the  weapon  and  take  the  men  away  from  the  cities,  and 
each  will  be  benefited  by  the  change. 

Q.  Will  that  change  come  about  in  an  orderly  man- 
ner? 

A.  I am  afraid  not.  It  was  not  developed  in  this  coun- 
try in  an  ordinary  manner,  and  I would  not  be  at  all 
surprised  if  there  were  some  unpleasant  features  and  dis- 
turbances in  our  large  cities  before  that  movement  is 
fully  under  way.  Men  don’t  like  to  go  back  to  the  small 
to’wns.  It  is  pleasanter  in  the  big  cities.  It  is  a slow 
process  but  nevertheless  it  will  be  done  because  in  the 
last  analysis  economic  forces  will  govern  regardless  of 
individual  wishes  and  inclinations. 

Chairman  Wilkerson : Did  you  have  any  further  ques- 
tions, Mr.  Alschular? 


436 


Mr.  Alschuler:  No,  sir. 

Chairman  Wilkerson:  Does  any  one  else  have  any 
questions  to  ask  Mr.  Hagenah?  (No  answer.)  You  may 
call  your  next  witness. 


R.  V.  Prather,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 
chief  by  Mr.  Alschuler,  and  testified  as  follows: 

The  Witness:  B.  V.  Prather,  secretary  Illinois  Gas 
& Railway  Association.  At  the  former  hearing  of  this 
matter  before  the  Commission  in  Springfield  estimates 
were  made  by  some  of  the  witnesses  as  to  the  require- 
ments of  utilities  for  the  next  two  years.  Since  that 
time  a questionnaire  was  prepared  and  sent  to  the  168 
electric  companies,  71  gas  companies,  71  electric  railway 
companies  and  46  water  companies. 

Mr.  Alschuler:  Mark  that  Prather’s  Exhibit  1, — 

Whereupon  said  document,  so  marked  for  identifi- 
cation ^‘Prather  Exhibit  1”  is  hereby  made  a part 
of  the  record  in  this  case. 

Prather  Exhibit  1. 

The  information  requested  will  not  be  made  public  as 
to  your  Company,  but  will  be  added  in  grand  total  of  all 
Illinois  companies. 

Questionnaire. 

ILLINOIS  STATE  ELECTRIC  ASSOCIATION 
ILLINOIS  ELECTRIC  RAILWAYS  ASSOCIATION 
ILLINOIS  GAS  ASSOCIATION 

1.  What  is  the  amount  of  expenditures  made  by 
your  Company  up  to  April  1,  1920,  for 
which  bonds,  stocks,  notes  ot  other  se- 
curities have  not  been  sold!  In  other 
words,  what  amount  of  financing  would  be 
necessary  as  of  April  1,  1920,  to  take  care 
of  all  past  capital  expenditures! $ 


437 


2.  (a)  What  is  the  total  amount  of  refinancing 


between  April  1,  1920,  and  December,  31 

1921?  $ 

(b)  What  was  interest  rates  on  securities 

to  be  refunded  ? % 

3.  What  are  the  minimum  requirements  for 
additional  capital  expenditures  between 
April  1,  1920,  and  December  31,  1921,  in 
order  to  continue  present  service? $ 


4.  Providing  you  are  able  to  finance  yourselves, 

what  capital  expenditures  should  be  made 
between  April  1,  1920,  and  December  31, 

1921,  in  order  to  give  the  proper  kind  of 
service  and  put  the  property  in  such  shape 
as  would  ordinarily  be  considered  practica- 
ble, provided  satisfactory  means  for  financ- 
ing could  be  found? $. 

5.  What  additional  capital  expenditures  be- 

tween April  1, 1920,  and  December  31, 1921, 
desired  by  communities  would  you  be  wil- 
ling to  make,  if  your  return  on  present  in- 
vestment and  means  of  financing  were  sat- 
isfactory?   $ 

Note, — Where  data  is  asked  above  covering  period 
April  1, 1920,  to  December  31,  1921,  please  divide  if  prac- 
ticable, giving  data  for  period  from  April  1,  1920,  to  De,- 
cember  31,  1920,  and  from  January  1,  1921,  to  December 
31,  1921. 

Name Company. 

By 

The  Witness  (continuing)  : — in  the  state  outside  of 
Chicago  requesting  certain  information  as  to  the  amount 
of  expenditures  that  had  been  made  for  which  bonds, 
stocks  or  other  securities  had  not  been  sold,  the  amount 
of  refinancing  and  the  minimum  requirements  for  addi- 
tional capital  expenditures  to  December  31,  1921.  We  at- 
tempted to  get  this  separate  as  to  1920  and  1921,  but 
the  data  didn’t  come  in  so  it  could  be  separated.  The 


438 


amount  of  financing  necessary  to  give  the  proper  kind  of 
service  and  put  the  property  in  such  shape  as  would  be 
ordinarily  considered  practicable  and  what  additional 
capital  expenditures  desired  by  communities  the  compa- 
nies w^ould  be  willing  to  make  if  satisfactory  financial 
arrangements  could  be  made,  and  the  rate  of  interest  on 
securities  to  be  refunded. 

We  didn’t  get  as  many  answers  possibly  as  we  should 
have.  We  got  about  40  from  all  of  them.  From  these 
answers,  from  40  gas  and  electric  companies,  12  electric 
railway  companies  and  five  water  companies  I have  made 
a tabulation  showing  the  requirements  to  December  31, 
1921,  as  to  the  companies  reporting  only,  minimum  re- 
quirements which  absolutelv  must  be  met,  $60,640,524.21. 

Mr.  Alschuler:  Have  you  stated  here  how  many  of 
these  questionnaires  you  sent  out,  how  many  ditferent 
companies? 

A.  Yes,  sir.  If  you  will  recall,  Mr.  Denman,  presi- 
dent of  the  Electric  Association,  made  an  estimate  that 
there  was  fifty  million  required  for  the  electric  compa- 
nies alone.  From  the  forty  electric  companies  answering 
this  questionnaire  it  shows  $54,411,000.  The  amount  of 
financing  necessary  for  continued  normal  operation  is 
$106,501,120.50.  The  amount  the  companies  would  be 
willing  to  spend  if  satisfactory  financial  arrangements 
could  be  made, — this  only  including  what  the  operators 
recommend  spending,  not  all  that  the  communities  re- 
quest,-—$124,823,275. 

The  tabulation  also  shows  that  the  interest  rates  on 
securities  to  be  refunded  during  this  time  run  from  5 
to  lOi  per  cent.,  with  an  average  of  approximately  7 per 
cent.  None  of  these  figures  include  anything  for  tele- 
phone companies.  That  has  been  compiled  separately. 

Also  at  a former  hearing  reference  was  made  as  to 


439 


the  amount  of  utility  securities  other  than  railroads  held 
by  insurance  companies,  and  from  the  latest  data  we  are 
able  to  get  any  information  on  in  this  matter,  insurance 
companies  hold  approximately  $370,000,000,  national 
banks  approximately  $296,000,000.  We  were  unable  to 
secure  any  data  as  to  the  amount  held  by  state,  private 
or  savings  banks  or  by  trust  companies  or  large  es- 
tates. 

Commissioner  Lucey:  Is  that  in  the  country  at  large! 

A.  That  is  in  the  United  States. 

Q.  You  don’t  specify  as  to  what  kind  of  securities 
those  banks  and  trust  companies  hold! 

A.  I was  unable  to  secure  any  information  other  than 
the  totals  of  the  securities  held  other  than  railroads. 

• Q.  The  total  is  something  over  five  hundred  million! 

A.  About  $646,000,000.  That  does  not  include  savings 
banks.  We  couldn’t  get  any  information  on  that. 

Mr.  Alschuler:  That’s  all. 

Chairman  Wilkerson : Call  your  next  witness. 

J.  G.  Mitchell,  called  as  a witness  on  behalf  of  the 

utilities,  having  been  first  duly  sworn,  was  examined 

in  chief  by  Mr.  Alschuler,  and  testified  as  follows: 

Q.  Your  name  is, — 

A.  J.  G.  Mitchell. 

Q.  You  are  the  secretary  of  what  association! 

A.  Illinois  Independent  Telephone  Association. 

Q.  Mr.  Mitchell,  have  you  made  a compilation,  or 
rather  compiled  statistics  of  information  you  have  re- 
ceived in  response  to  a questionnaire  sent  out  by  the 
telephone  companies! 

A.  I have. 


440 


Q.  Will  you  give  us  the  result  of  that? 

A.  In  co-operation  with  the  work  of  the  office  of  Mr. 
Prather,  an  identical  questionnaire  was  sent  out  on  the 
mailing  list  of  the  Illinois  Independent  Telephone  Asso- 
ciation, and  it  was  also  sent  to  the  Bell  companies  in  the 
State  of  Illinois.  The  questions  are  identical  with  the 
questions  sent  to  the  electric  light  companies.  Approxi- 
mately 200  questionnaires  were  mailed  and  51  answers 
were  received. 

The  tabulation  of  the  answers  is  as  follows:  Mini- 
mum requirements  for  new  capital  consisting  of  the  sums 
reported  in  answer  to  questions  two  and  three  on  the 
questionnaire  for  all  telephone  companies  reporting,  $35,- 
468,241 ; necessary  for  continued  normal  operation,  being 
the  sum  of  the  answers  to  questions  one,  two  and  three 
on  the  uniform  questionnaire,  $86,467,940;  amount  com- 
panies are  willing  to  spend,  being  the  sum  of  the  answers 
received  to  questions  one,  two,  four  and  five,  $122,990,- 
640;  amount  required  for  expenditures  for  service  de- 
sired by  comi^unities  which  operating  companies  would 
recommend,'  being  the  sum  of  the  answers  to  question 
No.  5,  is  $36,522,700.  The  latter  amount  is  the  sum  of 
the  answers  given  to  a question  which  calls  for  the  ad- 
ditional amount  of  money  that  would  be  expended  to  meet 
the  requirements  of  the  communities  served  and  which 
would  be  recommended  by  the  operating  companies  in- 
volved. About  200  of  these  questionnaires  were  mailed 
and  51  were  returned. 

Q.  Is  that  all  you  have  to  say,  Mr.  Mitchell? 

A.  Yes,  sir. 

Mr.  Alschuler:  Any  questions  from  the  Commission? 

Chairman  Wilkerson:  Any  questions?  That’s  all. 
This  exhibit  is  introduced  by  Mr.  Mitchell. 

Whereu^non  said  document,  so  marked  for  identifi- 
cation ‘‘Mitchell’s  Exhibit  1,”  is  hereby  made  a part 
of  the  record  in  this  case. 


441 


Edwin  E.  Jones,  the  mayor  of  Bloomington,  made  the  fol- 
lowing statement: 

Mr.  Jones:  Gentlemen  of  the  Commission, — 

Chairman  Wilkerson : Your  full  name  for  the  record, 
Mr.  Jones? 

Mr.  Jones:  Edwin  E.  Jones.  My  purpose,  gentlemen, 
in  appearing  before  your  Commission  is  to  say  a word 
AAuth  regard  to  service  of  public  utilities.  I take  it  that 
the  public  are  willing  to  pay  a fair  price  for  good  serv- 
ice. They  have  built  up  their  home  conditions  upon  the 
service  of  public  utiliti(^  and  are  willing  to  pay  it,  but 
the  public  mind  is  not  in  position  to  meet  what  you  gen- 
tlemen have  had  given  to  you  this  morning  from  the  first 
gentleman  that  appeared  before  you,  and  it  is  for  that 
reason  that  the  utilities  are  appealing  to  you  for  better 
conditions  than  they  are  being  allowed  at  the  present 
time. 

I personally  have  been  opposed  to  this  great  proposi- 
tion of  most  of  the  city  officials  of  the  state  in  regard 
to  home  rule,  for  municipal  control  of  public  utilities 
because  I believed  tliat  the  public  were  not  in  position 
to  know  the  real  facts  and  were  not  willing  to  weigh 
them  as  they  should  be  weighed,  and  I am  sure  you  gen- 
tlemen get  the  real  facts  before  you,  and  when  that 
proposition  has  been  brought  up  I have  defended  the 
public  utility  commissioners  because  I knew  that  they 
knew  the  facts;  and  I am  not  here  to  tell  you  anything 
about  what  you  should  do,  but  I am  here  to  say  to  you 
that  you  are  in  position,  better  than  the  public  can  be, 
in  knowing  what  should  be  the  conditions  and  what  should 
be  allowed  public  utilities  in  the  operation  of  their  plants. 

What  the  public  are  insisting  upon  is  good  service 


442 


at  a fair  rate  of  compensation.  That,  I take  it,  is  the 
purpose  of  these  hearings.  You  hear  the  one  side,  you 
hear  the  complaints  of  the  public.  I am  just  here  to  say 
in  your  behalf  that  you  are  in  position  to  know  what 
should  be  done  and  that  I as  a public  official  am  here 
to  stand  back  of  you  in  doing  what  you  believe  is  your 
duty  from  the  facts  before  you  and  from  the  presentation 
of  the  statistics. 

I don’t  know  that  I have  much  more  to  say,  only  that 
the  one  thing  that  the  public  wants  is  service  and  that 
is  what  they  are  insisting  upon,  and  it  is  only  fair  that 
a utility  should  be  given  a fair  compensation  for  the 
rendering  of  that  service. 

Commissioner  Lucey:  Your  belief,  Mr.  Mayor,  is  that 
the  public  would  take  these  increased  rates,  if  increased 
rates  are  necessary,  with  much  better  grace  if  the  service 
was  kept  up  in  first  class  condition  I 

A.  Every  time,  yes,  sir. 

Q.  Wliich  is  theoretically,  as  a matter  of  fact,  what 
the  public  are  entitled  to. 

A.  Yes,  sir. 

Q.  The  question  of  home  rule  that  you  speak  of  is  un- 
doubtedly the  trend  that  the  municipal  opinion  takes 
when  they  find  that  service  is  not  up  to  the  standard 
which  it  thinks  it  should  be,  and  they  see  the  increasing 
cost  of  the  commodity  going  on  and  their  natural  conclu- 
sion is,  something  is  wrong  and  they  don’t  know  just 
what  that  something  is  and  they  would  like  to  take  ahold 
of  it  in  order  to  adjust  it  themselves. 

A.  From  my  experience  as  a city  official  I know  that 
the  utility  board  can  handle  those  questions  a great  deal 
better  than  the  public  can  knowingly.  I don’t  want  to 
take  your  time  any  further. 


443 


Q.  The  character  of  these  questions,  as  you  see  them 
here,  Mr.  Mayor,  are  such,  are  they  not,  to  indicate  to 
you  that  the  public  scattered  through  the  vast  number 
of  municipalities  in  this  state  vdth  different  ideas,  differ- 
ent interests  and  sometimes  with  one  utility  operating  in 
148  communities,  doesn’t  it  impress  you  as  an  almost 
absolute  impossibility  that  the  idea  of  home  rule  can  be 
made  applicable  to  utilities  in  that  condition! 

A.  That  it  can  be! 

Q.  Is  it  your  idea  that  it  can  be  made  applicable  to 
those, — 

A.  No,  sir,  I don’t  think  so. 

Q.  But,  as  a matter  of  fact,  it  requires  a state  com- 
mission or  some  kind  in  order  to  do  so! 

A.  It  certainly  does.  I think  in  the  smallest  com- 
munity it  requires  it  to  be  fair  between  the  utilities  and 
the  public.  That  has  been  my  position  all  the  time. 

Chairman  Wilkersoii:  Have  you  given  any  thought  to 
any  method  which  might  be  used  to  give  to  the  public  ac- 
curate information  on  a subject  as  to  which  they  have 
had  practically  nothing  but  misrepresentations  for  a good 
many  years! 

A.  Only  the  thoroughest  investigation. 

Q.  I mean  by  that,  have  you  given  any  thought  as  to 
whether  or  not  there  is  any  practical  way  of  making  the 
people  understand  just  what  the  facts  are  about  this  sit- 
uation! 

A.  No,  it  is  a very  difficult  thing  to  make  the  public 
understand  those  things  which  they  don’t  want  to  un- 
derstand. There  are  so  many  of  the  people  are  biased  in 
their  opinion, — so  biased  in  their  opinion  that  they  will 
believe  sometimes  a statement  that  is  not  based  on  facts, 


444 


is  the  trouble.  So  the  public  is  appealing  to  you,  that 
is,  the  business  public  is  appealing  to  you,  to  this  com- 
mission, to  do  the  right  thing. 

Q.  Is  there  anything  that  could  be  done  in  the  cities 
themselves  to  bring  accurate  information  on  these  sub- 
jects before  the  people? 

A.  Publicity  is  all. 

Commissioner  Lucey:  The  publicity,  Mr.  Mayor,  that 
would  tend  to  show  the  necessities  of  the  utility  in  that 
community  and  its  desperate  condition  for  funds  with 
which  to  pay  increased  wages  and  increased  operating 
expenses  and  to  capitalize  its  business,  the  publicity  which 
would  try  to  be  of  any  value,  would  have  little  weight 
against  the  arguments  of  some  fellow  who  was  going  out 
on  the  stump  every  night  and  talking  in  the  different 
wards  and  making  his  campaign  on  the  simple  fact  that 
the  rates  had  been  raised  and,  of  course,  from  improper 
motives  according  to  his  argument.  It  is  hard  to  get  the 
real  facts  to  a public  that  are  being  misled  by  somebody 
who  is  seeking  to  profit  by  the  misleading  information 
which  he  is  peddling. 

A.  I know  that  is  the  truth,  and  I say,  by  the  most 
thorough  investigation,  that  is,  reports  and  valuations 
and  everything  to  be  presented  to  the  public,  it  could  not 
be  denied, — the  only  facts  that  could  go  to  the  public,  and 
then  they  would  be  denied,  I realize  that  too. 

Q.  But  they  would  be  strenuously  denied? 

A.  They  certainly  would. 

Q.  And  in  our  day  and  generation  the  newspaper 
which  was  designed  to  be  the  director  and  educator  of  the 
public  as  to  information  rather  falls  in  the  wake  instead 
of  being  out  in  front? 


445 


A.  Yes,  sir,  I know  that. 

Chairman  Wilkerson : Do  you  think  that  the  people  in 
this  state  who  are  opposed  to  confiscation  have  lost  all 
their  influence  with  the  newspapers? 

A.  I don’t  think  so. 

Q.  They  appear  to  have  lost  a good  deal  of  it  with 
some  of  them. 

Q.  That  is  certain.  I wouldn’t  appear  here  if  I was 
among  that  crowd. 

Q.  Do  you  think  if  they  would  really  try  to  bring 
their  influence  to  hear  on  newspapers  that  persist  in 
not  telling  the  truth  they  would  have  some  influence! 

A.  They  certainly  would. 

Commissioner  Dempcy:  There  are  places  manifestly 
in  this  state  where  by  rabid  agitation  people  have  been 
misled  to  some  extent  as  to  the  real  conditions,  isn’t 
that  true! 

A.  That  is  certain,  yes,  sir. 

Q.  Outside  of  those  localities,  from  your  knowledge 
of  the  people  over  the  state  generally,  you  say  they  are 
willing  to  pay  for  the  service.  Do  you  think  that  they 
are  alive  to  a reasonable  extent  to  the  real  situation  and 
the  demands  that  will  have  to  he  made  upon  them  before 
this  situation  eases  down! 

A.  No,  I don’t  think  the  public  are  educated  to  just 
the  exact  conditions. 

Q.  You  don’t  think  so! 

A.  I do  not. 

Q.  I believe  you  said  in  answer  to  one  of  the  Com- 
missioners, you  have  no  suggestion  to  make  as  to  how 
the  people  might  be  informed,  might  be  advised  as  to  how 


446 


this  real  situation  might  be  brought  to.  them  as  a live 
matter.  Did  you  make  any  suggestions  along  that  line 
at  all? 

A.  I have  heard  more  this  morning,  that  is,  in  a real, 
practical  way,  as  you  men  have  heard,  and  I only  got 
part  of  it,  but  if  the  public  today  could  have  heard  what 
you  have  heard  this  morning,  I think  they  would  do  more 
thinking  than  they  have  ever  done  along  these  lines. 
It  is  just  simply  because  they  don’t  know  conditions 
thoroughly. 

Q.  Personally  I think  if  some  means  could  be  adopt- 
ed and  effectively  carried  out  it  would  be  a very  im- 
portant step,  and  would  result  in  a great  asset  to  the  pub- 
lic utilities  and  those  who  are  trying  honestly  to  give  the 
best  service  within  their  power  in  the  different  communi- 
ties. 

A.  It  was  during  the  war  period  when  rates  were 
advanced  without  thorough  investigation  that  the  public 
in  general  got  an  idea  that  the  utilities  board  and  the 
utilities  in  general  were  being  favored  and  the  board  were 
not  paying  as  much  attention  to  the  rates  as  they  should. 
They  thought  they  were  getting  beaten  in  what  was  being 
done  and  they  got  rather  a bad  impression.  It  is  those 
things  we  have  got  to  overcome.  I realize  those  con- 
ditions as  thoroughly,  I think,  as  anybody  and  it  is  those 
things  that  have  brought  the  public  up  to  where  it  is 
now,  and  it  is  only  by  thorough  education  and  knowing 
the  exact  conditions  that  the  public  would  submit  to  these 
things,  that  is,  the  public  in  general,  but  the  business 
public  are  demanding  that  they  have  service,  and  serv- 
ice, I take  it,  is  one  of  the  great  arguments  that  any 
utility  is  going  to  have.  If  they  are  put  in  the  position 
where  they  can’t  give  service  they  are  going  to  be  con- 
demned continually. 


447 


Mr.  Alschuler:  Mr.  Jones,  you,  of  course,  realize  in 
the  matter  of  giving  service  there  are  a great  many 
troubles  that  utility  companies  now  face.  For  instance, 
the  matter  of  the  difficulty  in  obtaining  coal,  the  difficulty 
of  obtaining  money! 

A.  I realize  that. 

Q.  And  with  those  difficulties  removed,  of  course  serv- 
ice can  be  bettered. 

A.  A good  deal  better,  yes,  sir. 

Chairman  Wilkerson : Do  you  not  think  that  in  every 
municipality  in  this  state  there  are  business  men  of  the 
community  who  are  interested  in  the  fact  that  there  shall 
be  no  breakdown  in  the  service,  and  they  would  do  a very 
good  work  if  they  would  take  it  upon  themselves,  if  they 
would  see  to  it  that  accurate  information  is  brought  be- 
fore the  people  in  their  respective  communities! 

A.  It  is  very  important  and  they  could  do  a very 
good  work  along  that  line. 

Q.  If  the  men  who  know  the  facts  and  who  know  what 
it  would  mean  to  the  community  if  there  were  a break- 
down in  the  service  would  take  it  upon  themselves  to 
do  that  and  do  it  systematically, — 

A.  Yes,  sir,  I believe  that  is  true. 

Q.  You  think  that  would  be  a good  plan! 

A.  Yes,  sir,  I do  certainly. 

Q.  After  all  it  is  really  their  problem,  isn’t  it!  It 
is  the  problem  of  the  business  men  themselves  who  ap- 
preciate what  would  happen  if  there  should  be  a break- 
down in  the  service  rendered  by  these  utilities! 

A.  Yes,  sir,  it  is  their  community  problem. 

Q.  And  they  ought  to  handle  it! 


448 


A.  They  ought  to  handle  it,  yes,  sir. 

Q.  And  they  should  deal  with  these  gentlemen  who 
are  misrepresenting  the  facts  and  they  should  see  that 
accurate  information  is  brought  home  to  their  people? 

A.  Yes,  sir,  and  they  should  sustain  you  gentlemen 
in  whatever  your  position  is  in  regard  to  the  utilities ; I 
believe  that. 

Chairman  Wilkerson:  I believe  that  is  all.  We  will 
take  an  adjournment  until  1 :45. 

Whereupon  the  hearing  was  suspended  till  1 :45 
p.  m.,  same  day,  same  place. 

Springfield,  Illinois,  May  17,  1920. 

Monday,  1 :45  p.  m. 

Hearing  reconvened. 

Parties  present:  Same  as  before. 

Chairman  Wilkerson : Proceed  with  the  hearing. 

Mr.  Alschuler:  I understand  that  Mr.  Hodges,  the 
mayor  of  Granite  City,  is  here  and  desires  to  get  away. 

Chairman  Wilkerson:  Very  well. 

Bert  E.  Hodges,  the  mayor  of  Granite  City,  made  the  fol- 
lowing statement :‘ 

Mr.  Alschuler:  You  are  the  mayor  of  Granite  City? 

Mr.  Hodges:  Yes,  sir. 

Chairman  Wilkerson : Give  your  full  name  to  the  Ee- 
porter. 

Mr.  Hodges : Bert  E.  Hodges.  I was  selected  as  one 
of  a committee  from  the  commercial  club  to  come  before 
your  honorable  body  and  give  a brief  outline  of  the  ne- 
cessity for  utility  extensions  and  service  there.  We 


449 


wanted  to  submit  a brief  and  a plat  showing  the  inade- 
quacy of  the  service  that  we  are  receiving  from  the  pub- 
lic utilities.  Granite  City,  as  you  probably  know,  is  the 
heart  of  an  industrial  district.  It  is  probably  one  of 
the  largest  and  possibly  the  fastest  growing  cities  in  this 
section  of  the  country,  and  it  has  outgrown  the  service 
we  get  from  the  public  utilities. 

Now,  there  is  under  construction  at  this  time  a coke 
plant  there,  about  possibly  a $10,000,000  plant,  which  will 
employ  2,500  people,  that  is  practically  without  any  serv- 
ice in  the  way  of  transportation  and  light,  that  is,  electric 
and  gas,  and  as  you  will  see  on  this  plat,— this  is  an 
older  plat,  however ; we  are  having  a new  plat  made  now 
that  we  will  submit  to  the  Commission  within  a short 
time.  These  outlying  districts  are  all  built  up  in  the, — 
into  home  sites  and  these  people  are  always  complain- 
ing for  service,  water,  gas  and  electric,  and  they  are 
wholly  without  any  transportation  facilities  at  all  out 
in  this  section  as  well  as  over  in  this  part  of  town  (in- 
dicating on  plat),  and  I as  a public  official  have  come, — 
they  have  come  to  me  for  service  and  I in  turn  go  to  the 
utility  companies  and  they  tell  me  that  they  are  not  in  a 
position  to  serve. 

Now,  we  are  not  here  to  suggest  a remedy  but  we  are 
here  merely  to  give  a brief  outline  of  what  we  need  and 
to  say  to  you  gentlemen  that  the  commercial  club  repre- 
sents the  business  interests, — it  is  made  up  of  men  that 
are  representative  of  the  business  interests  of  that  sec- 
tion of  the  country  down  there  and  they  are  willing  and 
anxious  to  co-operate  in  any  way  possible  with  this  body 
and  with  the  utility  corporations  to  relieve  this  condition 
there  of  the  inadequate  service.  We  realize  that  it  is  a 
town  that  is  growing  and  has  grown  so  rapidly  in  the  last 
10  years  that  it  is  absolutely  essential  at  this  time  that 


450 


we  have  these  extensions  made  for  the  future  growth  and 
industrial  development  of  our  city  especially  in  that  sec- 
tion of  the  city  alone,  that  industrial  district  on  the  east 
side  of  the  river,  what  we  call  the  great  east  side. 

Commissioner  Lucey:  You  need  additional  facilities, 
Mr.  Mayor!  That  is  what  you  want! 

A.  Yes,  sir.  As  I say,  this  part  of  the  map  where  you 
see  these  different  plats  of  grounds,  is  all  built  up  into 
homes,  and  is  now  in  most  cases  without, — 

Q.  Isn’t  there  a street  car  line  up  here  on  Madison 
avenue ! 

A.  Yes,  but  that  is  a one  track  interurban  line  and 
it  has  practically  no  service. 

Q.  That  is  the  only  thing  you  have  in  here! 

A.  That  is  the  only  thing  we  have  in  there. 

Q.  That  is  the  road  out  to, — where  does  that  lead  to 
from  there ! 

A.  Madison  avenue!  That  goes  into  Alton.  I have 
with  me  on  this  committee  Mr.  Masserang  and  Mr.  Bar- 
ney, who  I would  like  to  have  go  into  details  with  your 
board  here.  They  can  give  you  probably  a better  idea  of 
the  inadequate  housing  conditions  we  have  there  and  the 
inadequacy  of  the  service  that  our  homes  are  receiving 
from  these  utility  corporations. 

Chairman  Wilkerson:  We  would  be  pleased  to  hear 
from  those  gentlemen. 

Mr.  Alschuler:  I was  going  to  state,  they  are  not  in 
such  a hurry  to  get  away  and  there  are  some  other  gentle- 
men we  would  like  to  present  first,  and  Mr.  Hodges 
wanted  to  get  away.  We  have  some  other  gentlemen  here 
who  are  anxious  to  get  away  and  we  would  like  to  put 
them  on  at  this  time. 


451 


Chairman  Wilkerson:  Very  well.  This  may  be  ad- 
mitted as  Hodges’  Exhibit  1,  and  this  map  as  Hodge’s 
Exhibit  2. 

Whereupon  said  documents,  so  marked  for  identifi- 
cation respectively  Hodge  Exhibit  1”  and  ‘‘Hodge 
Exhibit  2”  are  hereby  made  a part  of  the  record  in 
this  case. 


V William  R.  Compton,  called  as  a witness  on  behalf  of 

the  utilities,  having  been  first  duly  sworn,  was  exam- 
ined in  chief  by  Mr.  Alschuler,  and  testified  as  fol- 
lows : 

Q.  State  your  name,  residence  and  your  business  or 
occupation. 

A.  William  R.  Compton,  St.  Louis,  president  of  the 
William  R.  Compton  Company,  investment  bankers,  pres- 
ident of  the  American  Trust  Company,  St.  Louis. 

Q.  How  long  have  you  beeii  engaged  in  the  bonding 
and  banking  business! 

A.  Thirty  years. 

Q.  Mr.  Compton,  liave  you  had  exhibited  to  you  this 
question  in  the  questions  to  bankers! 

A.  I have  a copy  before  me. 

Q.  And  that  is  the  general  question  wliich  was  sub- 
mitted to  bankers  previously  at  this  hearing, — at  the  pre- 
vious hearings! 

A.  Yes,  sir,  I believe  so. 

Q.  Will  you  please  give  your  answers  to  those  ques- 
tions, Mr.  Compton! 

A.  What  is  the  situation  with  reference  to  the  de- 
mand for  capital  by  industrial  concerns  and  public  utili- 
ties! There  is  hardly  a public  utility  company  in  the 


country,  I presume,  that  is  not  earnestly  seeking  for  more 
capital.  During  the  war  they  were  prohibited  from  seek- 
ing for  capital  and  the  population  has  grown  consider- 
,ably  in  the  interval  and  now  comes  the  time  when  they 
should  adopt  a program  of  expansion  and  where  the  cost 
of  money  is  almost  prohibitive. 

I was  very  much  interested  last  Saturday  in  listening 
to  an  address  of  Daniel  Willard  of  railroad  fame,  an 
argument  that  he  presented  for  increased  tariffs  for  rail- 
roads. He  mentioned  an  issue  of  securities  which  has 
been  recently  offerred  in  this  country  by  American  bank- 
ers, that  of  the  Canadian  Pacific  Railroad.  He  stated 
that  he  was  somewhat  startled  to  note  that  the  Canadian 
Pacific  Railroad  was  able  to  obtain  capital  in  America 
at  a less  rate  of  interest  than  American  railroads,  but 
after  thinking  this  over  he  realized  the  reason.  The 
Canadian'  government  during  the  war  had  allowed  its 
railroads  to  increase  their  taritfs  to  a point  where  they 
could  not  only  take  care  of  operation  and  maintenance, 
interest  on  obligations,  but  also  enabled  the  railroads  to 
pay  the  same  dividend  rates  which  they  had  been  accus- 
tomed to  paying  in  pre-war  times.  As  against  that 
American  railroads  had  not  been  allowed  by  our  gov- 
ernment, either  wisely  or  unwisely,  similarly  increased 
tariff  rates,  the  deficit  having  been  paid  by  our  govern- 
ment and  the  costs  saddled  on  the  American  people,  the 
net  result  being  that  the  Canadian  railroads  had  their 
credit  maintained  and  the  credit  of  the  American  rail- 
roads was  destroyed.  Therefore  the  American  people 
believed  that  the  Canadian  railroads  would  be  able  not 
only  to  take  care  of  their  interest  charges  but  create 
a margin  of  safety  for  the  protection  of  the  principal. 

I think  somewhat  similar  conditions  could  be  applied 
to  our  public  utility  companies  in  America.  They  have 


453 


not  been  able  to  earn  a fair  rate  on  the  invested  capital 
and  I might  say  along  that  line  that  the  idea  of  issuing 
credits  for  capital,  that  is,  evidences  of  debt,  notes, 
bonds,  mortgages  and  so  forth,  is  all  right  up  to  a cer- 
tain point,  but  capital  should  be  invited  in  as  partners. 
In  other  words,  additional  stock  should  be  issued  and 
sold  to  the  public,  and  it  can  only  be  sold  if  that  stock 
is  entitled  to  and  does  earn  a fair  interest  return. 

As  to  the  cost  of  present  day  financing  much  testi- 
mony has  been  submitted  to  you.  My  own  would  only  be 
a repetition.  I can,  however,  recite  a number  of  illus- 
trations of  the  cost  of  financing  of  important  industries 
in  the  last  month  or  two.  The  Western  Electric  Com- 
pany with  25,000,000  7 per  cent,  notes  maturing  in  1925. 
They  were  offered  on  a 7.35  basis  or  a price  of  984. 
Now,  on  financing  of  this  character  it  is  necessary  to 
find  some  group  of  bankers  who  will  take  the  commit- 
ment, and  that  group  of  bankers  must,  of  course,  be  paid 
a profit.  Moreover,  in  the  distribution  it  is  necessary  to 
organize  a sub-syndicate  consisting  of  the  dealers  through- 
out the  country  and  they  must  be  paid  and  paid  well 
for  their  services.  It  is  fair  to  assume  from  my  experi- 
ence in  financing  of  this  character  that  the  Western 
notes  did  not  bring  the  company  over  944,  possibly 
not  over  94,  which  would  bring  the  cost  of  the  money  to 
8.40  per  cent.  The  Anglo-American  Oil  Company,  15,- 
000,000  financing  cost  about  8.60  per  cent.;  the  Union 
Electric  Light  & Power  Company,  two  and  a half  million, 
cost  about  8.80  per  cent. ; the  B.  F.  Gfoodrich  Tire  Com- 
pany, thirty  million,  cost  about  8.70  per  cent. ; the  Asso- 
ciated Simmons  Hardware  Company  of  St.  Louis,  seven 
and  a half  million,  about  8.80  per  cent. 

Commissioner  Lucey:  You  are  not  giving  now  the  re- 
turns to  the  investor?  • ' 


454 


A.  No,  sir,  I am  giving  the  cost  to  the  company.  The 
Southwestern  Bell  Company,  which  is  a case  in  point,  a 
syndicate  in  which  I was  largely  interested,  their  financ- 
ing cost  about  8.75  per  cent.  These  are  all  well-known 
companies.  The  lesser  companies  are  finding  it  extreme- 
ly difficult  to  obtain  money  on  any  basis  at  all,  and  some 
financing  of  smaller  and  less  well-known  concerns  is  cost- 
ing as  much  as  10'  and  11  per  cent. 

During  my  business  life  I have  been  a very  extensive 
dealer  in  municipal  bonds.  They  have  enjoyed  great 
popularity  during  the  war  period  on  account  of  their 
freedom  from  the  income  tax.  As  an  illustration,  how- 
ever, of  the  cost  of  financing  to  municipalities  I have 
numbers  and  numbers  of  issues  of  municipal  bonds  which 
I could  offer  to  yield  6 per  cent,  and  they  are  practically 
going  begging  on  this  market.  As  against  that  but  a 
short  year  ago  these  same  securities  would  have  prob- 
ably been  selling  on  a 5 per  cent,  basis.  I have  obliga- 
tions of  as  great  a state  as  the  State  of  Minnesota  which 
I can  offer  to  yield  5.40  per  cent. 

I don’t  think  there  is  much  else  that  I have  to  say 
at  the  present  time.  My  mind  reverts  to  an  old  quoted 
statement  by  a railroad  man  many  long  years  ago  in 
which  he  was  said  to  have  said  at  least : ^^The  public  be 
damned.”  And  I am  of  the  opinion  that  now  it  comes 
to  the  point  where  the  public  is  saying  to  the  utility 
companies  that  they  he  damned ; and  until  the  two  crowds 
get  together  and  realize  that  invested  capital  has  rights 
and  that  capital  can  not  be  attracted  except  it  be  shown 
that  it  is  safely  employed  and  has  more  than  a rea- 
sonable chance  of  a safe  investment, — not  only  the  pay- 
ment of  interest  but  principal  as  well. 

The  public  utility  companies  can  not  expand.  The 
mayor  of  Bloomington,  I believe,  was  here  this  morning 


455 


and  said  that  what  the  people  wanted  was  better  service. 
That  is  true.  That  is  what  they  want  and  what  they 
should  have  and  what  they  demand,  but  I believe  on  the 
other  hand  the  public  utility  companies  in  general  are 
trying  to  be  good,  that  they  are  trying  with  the  service 
that  they  are  able  to  give  to  do  well  by  the  public.  If 
they  are  to  give  better  service  they  must  have  more 
money  for  betterments  and  for  expansion,  and  this  can 
only  be  obtained  at  a considerable  cost  and  it  can  only 
be  obtained  if  the  public  service  commissions  are  willing 
to  protect  that  capital  through  the  advancement  of  rates 
from  time  to  time  as  the  cost  of  operation  and  the  cost 
of  capital  increases. 

I am  a firm  believer,  moreover,  in  something  that  spells 
a perpetual  franchise.  I don’t  believe  that  capital  to 
any  extent  can  be  drawn  into  public  service  companies 
where  franchises  are  limited  to  a term  of  years.  This  is 
a matter  that  will  have  to  be  very  carefully  worked  out 

Commissioner  Lucey:  You  know  they  have  that  pro- 
vision in  Wisconsin  and  in  Indiana  in  a modified  form? 

A.  Yes,  I know  they  have.  Of  course,  we  have  the 
same  troubles  in  Missouri  that  you  have  here.  I might 
say  that  I am  not  directly  or  indirectly  connected  with 
any  public  service  corporation  in  the  State  of  Illinois, 
nor  do  I know  that  I have  been  largely  instrumental  in 
financing  any  of  them,  so  my  testimony  is  simply  gen- 
eral in  character.  If  there  is  no  question  you  would  like 
to  ask  me, — 

Q.  In  your  statement  about  the  cost  of  financing  these 
different  institutions,  your  mentioning  that  some  were 
utilities  and  some  were  industrial  companies,  in  your 
mind  simply  proves  the  fact  that  the  utility,  if  it  is  going 
to  be  financed  at  all,  must  meet  the  competition  of  the 
industrials  for  money  in  the  money  market? 


456 


A.  That  is  exactly  it.  You  pick  up  a statement  or  a 
circular  describing  an  issue  of  industrial  bonds  and  most 
bankers  like  to  state  in  those  circulars  that  the  interest 
charges  are  earned  three  or  four  or  five  or  seven  times 
over. 

Q.  At  least  they  want  to  say  twice  over? 

A.  At  least  twice  over  and  twice  is  a very,  very  small 
margin.  I know  of  one  industrial  company  that  we  have 
financed  to  some  extent, — they  need  a million  or  two  dol- 
lars more  of  capital  now  and  they  can’t  show  interest 
returns  on  that  capital  of  more  than  two  times,  and  we 
feel  that  it  is,  or  was  utterly  impossible  to  provide  them 
the  capital,  that  there  is  so  much  competition  by  indus- 
tries who  can  show  two  and  a half  and  three  or  more 
times  that  it  would  be  impossible  to  secure  that  money  for 
them. 

Now,  the  public  service  corporations  are  barely  ex- 
isting, simply  taking  care  of  their  interest  charges  and 
struggling  to  do  that.  It  is  not  very  attractive  to  the 
investor  and  we  can’t  compel  capital  to  undertake  any 
particular  form  of  investment.  There  seems  to  be  in 
the  public  mind  some  thought  that  the  owners  of  public 
utility  corporations  are  possessors  of  colossal  fortunes 
and  they  are  eager  and  anxious  to  dump  more  money  into 
the  properties.  They  forget  that  those  securities  have  to 
be  sold  to  the  investor.  As  a matter  of  fact,  they  are  not  a 
class  of  security  which  is  inviting  to  savings  banks,  to 
large  estates  or  to  life  insurance  companies.  It  is  an 
attack  on  an  army  of  rather  modest  size  investors  and 
they  are  discerning  like  any  one  else  and  when  they  dis- 
cover that  the  attacks  are  being  brought  on  these  prop- 
erties, that  they  are  not  earning  their  interest  charges, 
that  many  of  them  are  going  into  the  hands  of  a receiver, 
it  naturally  causes  a great  distrust. 

Chairman  Wilkerson:  Call  your  next. 


Bkeckeneidge  Jones,  called  as  a witness  on  behalf  of  the 

utilities,  having  been  first  duly  sworn,  was  examined 

in  chief  by  Mr.  Alschnler,  and  testified  as  follows : 

Q.  Will  yon  please  state  your  name,  your  residence 
and  your  business^ 

A.  Breckenridge  Jones,  St.  Louis,  president  of  the 
Mississippi  Valley  Trust  Company. 

Q.  How  long  have  you  been  engaged  in  banking,  Mr. 
Jones? 

A.  30  years. 

Q.  Mr.  Jones,  you  have  had  submitted  to  you  this 
question  entitled,  ‘ ^ Questions  to  bankers,  ’ ’ have  you  not? 
This  was  prepared  with  special  reference  to  the  City  of 
Chicago  and  they  changed  Chicago  to  St.  Louis,  and  if 
you  will  please  answer  that  and  make  such  other  state- 
ments concerning  the  situation  as  you  may  care  to? 

A.  There  are  a few  general  statements  that  I should 
like  to  make.  When  I Avas  invited  to  come  here  I noted 
down  some  suggestions  I wanted  to  make. 

Q.  Go  ahead,  Mr.  Jones. 

A.  Your  first  question  refers  to  industrial  concerns 
and  the  demand  for  capital  by  industrial  concerns  and 
public  utilities.  This  brings  at  once  to  my  mind  the  dis- 
tinction between  them,  as  to  why  it  has  been  more  diffi- 
cult to  get  money  for  public  utilities  than  to  get  it  for 
industrial  enterprises. 

One  of  the  reasons  why  securities  of  public  utilities  are 
discriminated  against  is  that  in  individual  enterprises 
the  amount  of  earnings  is  not  fixed.  The  price  at  which 
the  product  may  be  sold  is  not  fixed.  The  selling  price 


458 


of  the  product  can  respond  to  the  cost  of  production. 
This  response  can  be  along  natural  lines  and  at  natural 
times.  The  individual  enterprise  is  not  the  football  of 
politics,  nor  is  it  the  subject  of  attack  by  organized  and 
individual  self-constituted  public  critics  and  sensational 
newspapers.  The  individual  enterprise  does  not  have  the 
scope  of  its  activities  and  the  period  of  its  extensions 
fixed  in  a franchise.  In  an  individual  enterprise  the 
investor  has  some  chance  to  get  his  principal  repaid. 

In  the  case  of  public  utilities  the  courts  and  commis- 
sions will  place  the  maximum  rate  of  return  on  the  value 
of  the  property  now  in  use  by  the  public.  There  is  no 
assurance  that  the  investor  will  get  this  maximum,  which 
has  never  been  more  than  the  ordinary  reasonable  rate  of 
return  that  an  investor  can  get  in  a real  estate  mortgage 
or  other  open  market  investment.  This  maximum  rate 
is  subject  to  all  the  contingencies  of  the  business,  strikes, 
damage  by  mobs,  explosions,  radical  or  unusual  improve- 
ments or  discoveries,  for  example  the  change  that  comes 
from  a horse  car  system  to  cables  with  their  conduits 
and  steam  power  houses,  then  the  change  from  cables  to 
the  trolley  system  with  the  electric  power  houses,  the 
abandonment  of  the  old  conduits  and  the  revolutionary 
changes  in  the  power  house.  Then  there  may  come  a 
change  from  the  central  power  house  to  a storage  battery, 
from  an  electric  power  house  to  water  power.  The  al- 
lowed depreciation  charge  does  not  take  care  of  these  ex- 
traordinary obsolescences.  This  maximum  return  is  but 
a reasonable  interest  return  and  provides  for  no  amorti- 
zation of  principal. 

Some  time  ago  I glanced  through  Whitten’s  valuation 
of  public  utilities  containing  the  decisions  of  the  courts 
and  commissions,  and  I do  not  recall  that  in  a single 


459 


instance  was  there  even  a reference  to  amortizing  the 
principal,  and  yet  in  most  of  the  states  the  public  utility 
is  operating  under  a franchise  that  limits  as  to  time  the 
number  of  years  that  the  company  can  operate  under  the 
franchise.  At  the  end  of  the  franchise  what  has  become 
of  the  principal!  The  company  is  not  allowed  enough  to 
pay  interest  and  provide  for  a reduction  of  the  debt  from 
year  to  year.  In  real  estate  mortgages  and  industrial 
enterprises  serial  payments  are  frequently  required  and 
the  security  is  becoming  better  from  year  to  year.  And 
then  the  investor  usually  prefers  a closed  mortgage.  In 
a real  estate  or  industrial  plant  mortgage  the  debtor  has 
provided  all  the  money  that  he  expects  to  borrow.  He 
can  measure  the  extent  of  his  needs.  Who  can  measure 
the  financial  requirements, — capital  requirements  of  a 
public  utility!  If  it  doesn’t  need  money  for  extensions 
and  betterments  it  is  either  in  dead  hands  or  is  located 
in  a dead  community.  And  even  if  there  be  a closed 
mortgage  on  the  public  utility  that  very  restriction  usually 
throttles  the  company.  There  then  comes  along  first 
mortgages  on  separate  extensions,  unified  and  consoli- 
dated and  refunding  mortgages,  and  so  on  and  so  forth, 
and  when  the  company  can  not  meet  some  of  the  under- 
lying liens  and  can  not  sell  its  consolidated  or  its  refund- 
ings because  for  some  reason,  bad  management  or  an 
attack  on  the  property  by  reason  of  an  approaching 
municipal  election  or  a reason  connected  with  that  par- 
ticular corporation  or  possibly  by  reason  of  some  out- 
side general  situation  in  no  way  connected  with  that  par- 
ticular property,  such  as  war  or  other  conditions  which 
produce  a panic  or  a monetary  stringency,  a receiver  is 
appointed,  and  the  bonds  are  foreclosed  and  the  property 
covered  by  the  mortgage  is  sold. 


460 


Now,  the  system  must  be  preserved.  The  public  in- 
terest comes  first.  The  bondholder  must  take  his  chances 
in  reorganization.  I mention  these  matters  not  to  show 
in  various  instances  they  are  wrong  but  to  show  that 
there  are  considerations  that  make  the  investors  at  times 
shy  about  buying  public  utility  securities,  and  to  demon- 
strate that  if  the  public  is  to  get  the  service  the  Com- 
missioners must  grant  rates  that  will  produce  sufficient 
return  to  enable  the  companies  to  raise  the  money.  You 
can  fix  the  price  of  labor  but  you  can  T make  a man  labor 
and  you  can  fix  the  price  of  capital  but  you  canT  make 
the  capitalist  invest. 

The  public  want  the  service,  that  is  true.  Many  times 
we  have  had  low  rates,  but  it  is  not  the  low  rate  so  much 
as  the  service  that  the  public  want.  The  government 
took  hold  of  the  railroads.  We  have  had  an  Interstate 
Commerce  Commission  in  charge  of  them  for  years  fixing 
rates  and  presumed  to  make  them  fair,  but  as  soon  as  the 
government  came  to  operate  them  and  they  realized  the 
situation  they  found  that  they  couldnT  be  operated  for 
what  the  Interstate  Commerce  Commission  had  allowed; 
it  is  estimated  now  that  the  loss  of  the  government  in 
the  operation  of  the  railroads  will  be  about  $2,350,000,000. 
It  is  the  same  with  the  public  utility.  It  has  become 
known  and  well  known  as  to  the  railroads,  but  the  public 
utilities  have  been  starving  just  the  same  as  the  steam 
railroads  were  starving.  The  government  came  to  the 
relief  of  the  one.  It  has  not  come  to  the  relief  of  the 
other,  and  your  public  utilities  have  not  been  enabled  to 
make  the  extensions,  have  not  been  enabled  to  make  their 
improvements  and  they  have  been  going  through  this  pe- 
riod of  very  high  prices,  high  cost  of  production,  higher 
everything  that  they  had  to  buy,  on  a fixed  rate,  and  that 
rate  has  not  responded  readily.  It  is  not  like  the  indus- 


461 


trial  plant,  in  that  when  the  owner  finds  his  cost  of  pro- 
duction is  going  up  he  can  put  the  price  of  his  finished 
product  up  and  compensate  himself.  The  public  utilities 
have  been  going  through  a term  of  years  during  which 
in  comparatively  few  instances  have  they  had  relief  by 
an  increase  in  rates,  but  have  been  dependent  upon  the 
reserve  that  they  may  have  accumulated  through  other 
years,  and  they  have  gotten  in  this  position,  to  use  a 
Biblical  illustration,  where  the  lean  cattle  have  eaten  up 
the  fat  cattle,  and  now  you  are  still  in  the  period  of  star- 
vation and  there  are  no  more  fat  cattle  for  the  lean  cattle 
to  eat,  and  the  public  will  not  get  the  service. 

Commissioner  Lucey:  Maybe  they  didn’t  store  up  in 
those  fat  years. 

A.  No,  they  didn’t  because  the  public  utility  com- 
missions don’t  allow  them  to  store  up.  The  decisions  of 
the  courts  allow  them  only  enough  to  live  on  and  do  not 
allow  them  to  store  up  anything.  I am  glad  you  made  the 
suggestion  because  there  is  a perfectly  good  reason  why, 
and  I don’t  know  of  any  public  utility  that  has  had  seven 
fat  years  that  it  could  make  enough  to  carry  it  over 
seven  lean  years. 

Q.  In  the  comparison,  Mr.  Jones,  with  the  industrials, 
the  fact  should  not  be  lost  sight  of,  and  I don’t  imagine 
you  have,  that  the  industrial  companies  are  subject  to 
many  conditions  that  the  theory  of  regulation  is  supposed 
to  protect  the  utility  from. 

A.  Yes. 

Q.  That  the  utility  has  virtually  a perpetual  license 
although  it  has  got  apparently  a limited  franchise;  the 
commission  is  supposed  to  furnish  it  a fair  rate  of  return 
and  allow  it  operating  expenses  and  depreciation  aud 
so  forth.  There  isn’t  anybody  guaranteeing  that  to  the 


462 


industrial.  The  industrial  may  go  down  in  a panic  and 
lose  not  only  its  investment  but  the  whole  institution  may 
be  lost.  Now,  the  law  provides  for  the  protection  of  the 
utility.  Maybe  it  isiiT  getting  the  protection  it  is  en- 
titled to  but  it  is  protected  by  the  law  against  that  con- 
dition of  atfairs. 

A.  I am  glad  you  have  suggested  the  theory  of  a pub- 
lic service  commission,  and  the  presumption, — I think 
you  are  right  in  both  instances,  but  I submit. that  the 
theory  has  not  been  carried  out  and  the  presumption  is 
not  justified  by  the  results.  Speaking  generally  now  as 
a proposition,  and  I don’t  mean,  of  course,  anything  re- 
flecting personally  on  this  Commission,  and  you  may  take 
the  illustration  of  what  occurred  with  the  Interstate  Com- 
merce Commission  of  which  by  reason  of  its  prominence 
and  continuation  in  office  so  long,  ought  to  be  the  best  reg- 
ulated of  them  all,  and  yet  after  it  had  had  charge  of  the 
railroads  for  a term  of  years,  when  the  government  came 
to  operate  them  it  found  that  it  could  not  operate  them 
two  years  and  a half  without  a loss  of  two  and  a quarter 
billions  of  dollars. 

If  the  public  service  commissions  acted  as  in  theorjq 
and  could  respond  promptly  to  conditions  as  they  arise, 
all  right,  but  I take  it, — I presume  in  the  very  nature  of 
the  case  that  you  are  flooded  with  special  requests  each 
one  of  which  would  require  an  enormous  amount  of  work, 
and  all  put  together  would  take  you  years  to  work  out. 
In  the  meantime  your  seven  lean  cattle  have  starved  to 
death  after  eating  up  the  seven  fat  cattle,  and  the  very 
point  that  I raised  there  is  that  in  a private  enterprise 
there  is  an  immediate  response,  a natural  response,  in- 
creased cost  of  the  product  when  increased  cost  of  pro- 
duction comes,  but  it  takes  years  to  bring  it  about  with 
a public  utility.  It  would  take  you  immeasurable  time  if 


463 


you  had  to  take  up  every  individual  utility  in  the  state 
and  pass  on  its  individual  merits.  No.  69  or  129  would 
be  dead  before  you  got  half  way  to  it. 

Q.  Well,  now,  without  interrupting  you,  in  the  last 
year  or  two  this  Commission  has  handled  nearly  every 
utility  in  this  state  and  with  most  of  them  has  granted 
relief.  We  anticipated  the  situation  before  the  cases 
finally  arrived  at  a final  settlement.  We  operate  under 
temporary  orders,  so-called,  by  which  we  grant  relief 
as  things  go  on,  as  times  goes  on,  until  the  case  is 
finally  settled.  I say,  we  have  stepped  into  the  breach, 
this  Commission  has,  and  I think  nearly  all  the  com- 
missions throughout  the  country  have  met  the  situation 
by  granting  so-called  emergency  relief  measures  until 
the  facts  could  be  determined.  I don’t  mean  that  the 
utilities  have  been  satisfied  with  the  relief  granted,  but 
they  are  not  in  the  same  position,  of  course,  as  the  in- 
dustrials that  can  change  their  rates  over  night  to  meet 
the  shifting  and  varying  economic  conditions.  The  utili- 
ties have  taken  longer  it  is  very  true,  but  I think  without 
the  protection  of  the  utility  commissions  throughout  the 
states,  throughout  this  state  and  throughout  other  states, 
that  the  troubles  that  the  utilities  are  suffering  from  would 
have  been  passed  by  and  they  would  have  been  laid  away 
at  rest  and  their  troubles  would  be  over. 

A.  I agree  with  you  entirely.  General,  and  I am  a 
hearty  endorser  of  the  public  utility  commission  which  is 
the  only  thing  that  gives  the  public  utility  any  protection. 
I am  making  no  reflection  on  your  situation  here,  I am 
simply  making  a general  statement  of  what  the  public 
generally  finds.  They  find  a big  public  utility  in  one  of 
the  large  cities.  The  public  see  it  in  print  that  it  takes  a 
year  to  make  a valuation.  In  the  meantime  the  investors 


464 


in  that  enterprise  are  anxious,  they  don’t  know  where 
they  stand.  As  a banker,  I am  only  giving  you  the  kind 
of  things  that  I come  in  contact  with  where  I handle  pub- 
lic utility  securities,  and  it  is  material.  We  can  sell  indus- 
trial bonds  much  quicker  because  this  maximum  allow- 
ance that  you  are  allowing, — if  that  was  a guarantee  it 
might  be  one  thing,  but  it  is  not,  and,  as  I said,  all  of  these 
extraordinary  things,  all  the  obsolescences  that  come 
from  great  improvements  in  the  art  are  not  cared  for  by 
your  depreciation  charge.  I know  that  has  been  the 
experience  of  the  public  utilities  I have  been  connected 
with. 

Q.  Of  course,  you  found  too  that  as  testified  by  some 
of  the  bankers  in  Chicago  last  week  that  you  have  bought 
public  utility  bonds  at  par  or  at  close  to  par  in  the  times 
when  conditions  were  normal  and  now  when  some  of  the 
customers  come  in  to  realize  on  them  they  find  that  they 
are  worth  60  or  70  or  80  or  some  such  percentage  way 
below  what  you  sold  it  to  them  for.  Now,  the  trouble  is, 
of  course,  that  the  cities  have  grown  so  rapidly  that  the 
utility  companies  sometimes  are  unable  to  keep  up  with 
them,  and  the  other  conditions  which  you  suggested  make 
the  utility  corporations  unpopular  by  reason  of  the  at- 
tacks made  on  them,  and  naturally  prejudice  the  public 
against  their  securities.  But  do  you  not  think  that  those 
securities,  Mr.  Jones,  have  the  same  value  back  of  them, 
that  they  are  just  as  good  as  when  you  bought  them! 
That  is,  as  a concrete  proposition,  you  can’t  sell  them, 
and  in  that  test,  of  course,  they  are  not  as  good  as  when 
you  bought  them,  but  when  you  bought  them  you  thought 
they  were  worth  the  money  you  paid  for  them.  As  a 
matter  of  fact,  looking  at  them  now  you  don’t  see  that 
they  are  Avorth  any  less  money,  you  think  the  underlying 


465 


securities  are  as  good  and  should  be  as  good  in  the  mind 
of  the  public  as  when  you  bought  those  securities  ! 

A.  Yet  when  it  comes  due  you  can’t  collect  it. 

Q.  No. 

A.  You  can’t  enforce  your  security.  It  goes  into  a 
general  reorganization  plan  and  you  are  scaled  down.  It 
isn’t  like  a real  estate  mortgage  or  an  industrial  bond,  and 
I think  that  is  a great  advantage  the  industrial  bond  has 
over  it.  I am  only  giving  you  from  the  standpoint  of 
the  dealer  the  kind  of  things  why  the  public  say  that  they 
don’t  want  the  public  utility  securities. 

Now,  I would  like  to  say  one  other  thing  if  you  will 
permit  me.  The  suggestion  was  made  here  this  morning 
as  to  how  you  could  get  the  public  to  understand  these 
things.  Now,  if  you  will  allow  me,  in  all  courtesy  I 
think  that  is  exactly  what  we  have  got  public  utility 
commissions  for.  Say  I am  a business  man,  and  that  I 
have  a newspaper  and  notice  that  you  are  attacking  the 
local  gas  or  Union  Electric  or  railways  or  something  and 
I go  to  talk  to  them.  What  do  I know  about  them?  I 
can’t  get  the  details,  but  we  have  a public  utility  com- 
mission made  up  of  men  of  standing  and  character  that 
hears  all  sides  of  the  discussion.  If  the  public  utility 
commission  when  it  passes  on  those  companies  will 
make  an  adequate  report  as  it  is  usual  for  them  to  do 
and  we  can  get  those  reports  before  the  public,  or  if  we 
could  get  the  public  utility  commission,  if  it  were  prac- 
tical, to  go  into  the  various  counties  where  the  public 
utilities  are  located  about  which  they  are  passing  and 
have  the  hearings  there,  you  will  have  a means  of  educat- 
ing the  public  that  does  not  exist  if  your  hearings  are 
all  in  the  large  cities  or  if  your  findings  are  not  fully  rea- 
soned out  and  presented  to  the  public.  I believe  the  pub- 


466 


lie  utility  commission  is  the  greatest  protection  we  have 
and  it  is  your  findings  as  impartial  people  after  hearing 
all  sides,  it  is  your  findings  we  can  use  as  business  men 
in  going  before  the  press  and  helping  to  educate  our  pub- 
lic ; but  we  are  almost  entirely  dependent  upon  the  public 
utility  commission. 

Chairman  Wilkerson : Assuming  that  the  Commission 
does  these  things  in  the  way  of  assigning  reasons  for  its 
findings,  whose  fault  is  it  in  your  opinion  that  the  situa- 
tion as  to  the  railroad  companies  is  so  generally  under- 
stood by  the  people  that  they  now  view  with  calmness  and 
equanimity  the  proposed  increase  of  30'  per  cent,  in 
freight  rates  whereas  the  situation  is  not  understood 
as  to  other  utilities? 

A.  Because  the  public  have  had  it  so  seriously  im- 
pressed upon  them  by  this  condition  during  the  war. 
The  fact  that  the  government  has  operated  the  railroads 
had  made  it  a matter  of  greater  publicity,  and  the  public 
have  found  that  the  government  could  not  do  it,  that  it 
didn’t  have  rates  enough,  and  noAv  we  are  suffering  from 
it.  We  have  poor  facilities.  The  railroads  haven’t 
enough  equipment,  nor  sufficient  terminals,  and  if  it  is 
tied  close  up  that  way  now,  what  is  it  going  to  mean  to 
a great  agricultural  state  like  Illinois  when  your  crops 
come  to  be  moved  this  fall!  The  public  understand  that. 
They  have  had  it  harpooned  into  them,  but  they  don’t  feel 
the  same  way, — it  is  rather  like  the  man  out  in  the  small 
town  with  the  public  utilities,  like  the  man  in  Cleveland 
who  wanted  to  know  if  he  was  in  favor  of  the  three  cent 
fare  instead  of  five.  He  said  yes.  Why!  ‘ ‘ Because  it  is 
less  than  five.”  All  the  man  at  home  knows  about  his 
local  utility  is  whether  the  rates  are  up  or  down.  He 
wants  them  down,  and  we  can’t  lease  that  to  the  general 
impression  of  the  public  any  more  than  I can  in  my  bank 
in  regard  to  the  rate  on  loans,  whether  it  should  go  up  or 


467 


down.  Every  man  that  deposits  money  with  me  says, 
allow  more  interest  on  your  deposits.  Put  the  rate  up, 
but  the  other  fellow  that  borrows  says  just  the  opposite. 
It  is  the  managers  of  the  companies  that  have  got  to 
come  in  and  make  the  difference,  make  the  line  of  demar- 
kation  that  protects  them ; so  the  public  utility  commission 
is  the  only  body  we  have  that  would  come  in,  and  if  it  can 
make  its  stand  positively  and  fully  and  fearlessly  because 
it  knows  more  about  it  than  the  public  and  would  give 
its  reasons  for  it,  I believe  the  public  as  a rule  mean 
to  be  fair  and  they  will  follow  the  decision  of  you  and 
support  you.  There  is  a disposition  on  the  part  of  the 
public  generally  to  support  the  public  utility  commis- 
sions. 

Commissioner  Lucey:  Of  course,  when  these  commis- 
sions were  created,  all  along  about  1914,  they  came  into 
power  and  found  divergent  conditions  and  it  resulted 
from  the  investigations  they  made  they  were  enabled  to 
lower  rates  somewhat,  which,  of  course,  made  them  pop- 
ular with  the  gentlemen  who  live  in  the  towns  where  those 
utilities  operate,  but  since  the  war  came  on  the  converse 
has  been  true.  This  and  other  commissions  found  it 
necessary  to  elevate  rates  and  do  it  rather  rapidly  and 
necessarily  as  the  condition  of  the  utility  required.  That 
has  resulted  in  this  attack  on  the  utility  regulatory  body, 
which  is  a reflection  of  a prejudice  which  was  in  the  pub- 
lic mind  against  the  utility  in  the  first  place.  They  carry 
that  prejudice  to  the  utility  commission,  and  the  utility 
commissions  as  well  as  the  utilities  are  still  suffering 
from  what  for  lack  of  a better  term  I might  say,  want 
of  public  confidence. 

A.  I might  say,  if  you  will  allow  me,  General,  that 
the  public  utility  commission  is  the  one  to  decide.  It 
has  all  the  information  and  it  can  decide  what  is  right 
and  wrong.  It  does  not  depend  upon  whether  it  has  the 


468 


plaudits  of  the  man  in  the  street  and  the  general  public 
who  don ’t  pretend  to  understand  it.  The  intelligent  pub- 
lic will  support  and  follow  your  position. 

Q.  We  have  gone  on  that  theory  so  far. 

A.  There  is  one  other  phase,  if  you  will  allow  me. 
The  question  is,  how  long  this  is  going  to  last  and  wheth- 
er your  relief  should  be  temporary  or  permanent.  I 
think  there  are  certain  great  fundamental  problems,  or 
fundamental  abnormalities  that  are  in  the  situation  now 
that  are  so  distinct  and  so  marked  that  they  make  it  per- 
fectly clear  that  it  can  not  be  a temporary  situation.  We 
have  our  government  fixed  up  now  spending  on  the  basis 
of  about  $7,000,000,000  a year,  seven  times  what  it  was  be- 
fore the  war.  That  keeps  up  your  high  excess  profit  taxes 
and  income  tax.  You  know  that  is  not  going  to  be  changed 
in  any  reasonably  short  time.  The  government  has  got 
out,  outside  of  what  it  loaned  to  Europe,  $23,000,000,000 
of  bonds.  You  know  they  can’t  be  retired  in  a short  time. 
We  know  that  our  foreign  exchange  situation  is  all  to 
pieces.  We  had  last  year  four  billions  of  dollars  balance 
of  trade  in  our  favor,  and  we  have  had  a heavy  bal- 
ance of  trade  in  our  favor  for  several  years  and  yet  an 
abnormal  situation  still  exists.  We  have  four  billions  of 
dollars  owing  to  us,  the  balance  in  our  favor  and  we  are 
losing  gold ! That  is  aifecting  the  money  market  and  af- 
fecting prices. 

Now,  rents  are  high  everywhere.  You  know  that  it 
isn’t  going  to  be  quickly  relieved.  The  labor  situation 
is  all  out  of  shape  and  though  the  war  is  over  and  we 
brought  four  million  men  back  into  productive  life  it  is 
presumed,  but  the  facts  are  that  the  physical  products 
it  is  estimated  were  10  per  cent,  less  in  1919  than  they 
were  in  1918,  and  I might  go  on  freely  to  show  you  the 


469 


abnormal  situations.  Money, — just  as  much  money  as  we 
ever  had,  yes,  but  it  is  all  used  up  in  credits.  Banks, — the 
situation  in  the  New  York  clearing  house  banks  is  that 
they  have  loans  and  investments  of  a billion  dollars  more 
than  their  net  demand  deposits.  They  have  three-quar- 
ters of  a billion  dollars  loaned  out  more  than  all  their 
demand  and  time  deposits  put  together, — to  the  extent  of 
about  20  per  cent.,  and  it  is  about  the  same  thing  in  Phila- 
delphia and  in  Boston,  and  I know  of  it  in  St.  Louis.  Now, 
those  things  canT  be  righted  in  a short  time.  We  have 
got  our  banks  loaded  up  with  government  securities.  It 
will  take  time  for  them  to  get  out  and  it  is  not  a month’s 
question  or  a six  month’s  question,  or  a year  or  two  years’ 
question,  it  is  a great  long  swing  that  has  got 
to  be  made,  and  these  abnormalities  can  not  be  straight- 
ened out  in  a short  time.  I don’t  want  to  go  into  any 
more  detail  on  that  situation  and  I am  sorry  that  I have 
taken  up  so  much  of  your  time. 

Mr.  Alschuler:  That’s  all. 

Chairman  Wilkerson : Call  your  next  witness. 

Mr.  Alschuler:  I believe  now  Mr.  Barney  of  the 
Granite  City  commercial  club  desires  to  be  heard. 


R.  C.  Barney  of  Granite  City  made  the  following  state- 
ment : 

Chairman  Wilkerson:  You  have  something  to  submit 
relative  to  the  situation  in  Granite  City! 

Mr.  Barney:  Yes,  sir. 

Chairman  Wilkerson:  Give  your  full  name  for  the 
record. 


470 


Mr.  Barney:  E.  C.  Barney.  I believe  it  was  as  to 
the  extension  of  the  electric  service  and  the  street  car 
lines  and  the  gas  lines  in  the  interest  of  the  commercial 
club. 

Chairman  Wilkerson : What  have  you  to  say  as  to  the 
necessity  for  those  extensions? 

A.  On  account  of  the  growth  of  the  city  many  new 
additions  are  being  built  up  and  houses  are  being  built 
and  they  are  not  able  to  get  accommodations  from  the 
street  car  service,  electric  light  service  and  gas  service. 
I believe  those  services  ought  to  be  granted  to  them. 

Commissioner  Lucey:  You  have  a street  car  system 
there  now,  Mr.  Barney? 

A.  Yes. 

Q.  What  fare  do  you  pay  on  the  street? 

A.  There  is  a service  to  St.  Louis,  interurban  service 
altogether. 

Q.  You  haven’t  an  independent  street  car  line  in  the 
city? 

A.  No,  just  a loop  around, — ^well,  around  several  blocks 
one  way  and  several  the  other  way. 

Q.  Do  you  use  that  as  a street  car? 

A.  Yes. 

Q.  What  fare  do  you  pay? 

A.  I really  don’t  know. 

Q.  If  you  get  on  the  street  car  and  ride  five  or' six 
blocks  what  do  you  pay  the  conductor? 

A.  I think  it  is  a nickel,  though. 

Chairman  Wilkerson:  You  had  an  increase,  didn’t 
you  ? 


471 


A.  I really  don know. 

Commissioner  Lucey:  Do  you  know,  Mr.  Prather, 
what  that  is  ? 

Mr.  Prather : Five  cents. 

Chairman  Wilkerson:  Wasn’t  there  some  kind  of  an 
increase  granted  in  Granite  City? 

Mr.  Barney:  That  was  the  bridge  fare  to  St.  Louis. 

Chairman  Wilkerson:  I have  a recollection  here  that 
they  had  an  increase  in  fare  in  Granite  City. 

Mr.  Prather  : I think  he  was  talking  about  the  trac- 
tion system,  Mr.  Chairman. 

Commissioner  Lucey:  What  do  you  want  in  Granite 
City? 

Mr.  Barney:  Extending  the  loop  farther  out. 

Q.  In  other  words,  you  want  to  make  of  this  inter- 
urban  street  car  system,  you  want  to  make  it  a local 
street  oar  system? 

A.  Yes,  sir,  more  so  than  what  it  is. 

. Q.  No  question  about  the  city  and  citizens  being 
willing  to  pay  a fare  that  would  pay  a rate  of  return 
and  so  forth? 

A.  I believe  for  the  service  they  would  be  only  too 
glad  to  pay  it. 

Q.  Have  you  taken  that  up  with  the  street  car  com- 
pany ? 

A.  No,  I haven’t.  That  is  from  the  outlying  districts 
or  new  additions  that  have  no  connection  at  present. 

Q.  Did  you  take  it  up  with  the  street  car, — with  the 
utility  that  will  have  to  take  the  extension? 

. A.  No,  I haven’t  taken  it  up. 


472 


Q.  Yonr  commercial  club  might  talk  it  over  with  them. 
Maybe  they  will  put  it  in  for  you  without  getting  an 
order. 

Chairman  Wilkerson:  Anything  further  that  you  de- 
sire to  submit  in  addition  to  the  necessity  for  these  ex- 
tensions? 

A.  There  is  nothing  further.  I think  Mr.  Hodges 
has  submitted  about  all  I know  of. 

Chairman  Wilkerson:  Any  other  questions  of  this 
witness?  If  not  call  the  next  witnes,  Mr.  Alschuler. 

Mr.  Alschuler:  I believe  now  Mr.-Masserang  desires 
to  make  a statement. 


John  B.  Massekang,  of  Granite  City,  made  the  following 

statement : 

Chairman  Wilkerson:  Give  your  full  name  for  the 
record. 

Mr.  Masserang:  John  B.  Masserang. 

Q.  You  are  interested  in  the  Granite  City  situation? 

A.  Yes,  sir. 

Q.  Whom  do  you  represent? 

A.  I am  manager  of  the  Granite  City  Realty  Company. 

Q.  What  have  you  to  submit  to  the  Commission  rela- 
tive to  the  necessity  for  extensions  to  the  plants  of  the 
utilities  in  Granite  City? 

A.  I am  here  in  behalf  of  the  commercial  club  and 
the  city  in  general  asking  if  this  commission  could  be 
of  any  assistance  to  any  of  the  utility  companies  about 
making  some  extensions  for  Granite  City.  Granite  City 
has  outgrown  the  extensions  we  have  now  such  as  water. 


light,  gas  and  street  car  service.  You  have  got  a plat 
here,  but  this  is  an  old  plat  from  1911.  It  is  unfortunate 
we  couldn’t  get  our  new  plat  done  in  time  to  have  sent 
you  a copy,  but  you  will  see  the  necessity  of  getting  the 
extensions  made  for  these  districts. 

Q.  Is  it  the  opinion  of  those  whom  you  represent 
that  if  necessary  in  order  to  put  the  companies  in  posi- 
tion where  they  can  make  the  extensions  that  the  rates 
should  be  advanced? 

A.  Well,  normally,  yes,  I would,  and  I think  that  the 
people  at  large  would  be  willing  to  pay  an  additional  rate 
so  as  to  get  the  service.  They  have  no  service  now  at 
all.  They  have  come  before  the  commercial  club  many  a 
time  for  assistance  to  try  and  have  the  commercial  club 
help  get  behind  these  various  companies  and  make  these 
extensions.  The  company  tells  us  they  can’t  do  it  under 
the  present  condition,  and  I feel, — I am  almost  sure,  that 
they  would  be  willing.  Of  course,  it  is  for  this  Commis- 
sion to  work  out. 

Q.  If  you  had  to  choose  between  a continuation  of  low 
rates  and  an  advance  in  rates  with  the  extensions,  which 
would  your  people  select? 

A.  I would  say,  give  us  higher  rates  and  get  the  ex- 
tensions. 

Q.  Higher  rates  and  service  rather  than  lower  rates? 

A.  Yes,  sir. 

Mr.  Alschuler : What  company  were  you  referring  to? 

A.  I mean  now  the  various  companies, — I mean  all  of 
them.  They  are  all  interested  in  the  same  thing.  There 
is  no  water,  no  gas ; they  have  never  had  street  car  serv- 
ice, no  light  service.  It  has  been  all  in  the  same  shape. 


474 


Q.  What  street  oar  company  is  it  you  want  service 
from? 

A.  Well  — 

Q.  The  Illinois  Traction  Company? 

A.  The  Illinois  Traction  Company,  I think,  would  be 
the  proper  street  car  line  to  make  the  loop  through  there 
as  they  have  already  done.  I might  just  show  the  Com- 
mission how, — 

Commissioner  Lucey:  What  is  your  population  there 
now,  Mr.  Messerang,  in  Granite  City? 

A.  We  haven  T got  that  altogether,  but  we  ought  to 
have  about  21,000,  and  we  haven’t  had  any  additional 
street  car  service  for  the  last  12  years.  Now,  then,  that 
is  the  same  thing  you  see  and  hear ; the  town  is  growing. 
W^e  are  way  out  here ; this  is  all  grown  up  here  and  you 
can  see  the  position  we  are  in.  Our  manufactories  in 
Granite  City  employ  about  21,000  people.  You  can  see 
wdiere  these  factories  are  located,  and  these  people  from 
out  there  have  no  way  of  getting  to  town  almost  without 
walking  or  the  interurban,  and  they  don’t  stop  only  over 
here  and  that  is  every  two  hours,  so  you  can  see  the  posi- 
tion of  the  people  in  the  outskirts  of  the  city  there. 

Commissioner  Dempcy:  The  Illinois  Traction  is  the 
only  system  that  furnishes  you  with  any  transportation? 

A.  The  East  St.  Louis  & Suburban  comes  in  part  of 
the  way,  but  they  don’t  come  in  here  out  to  these  people 
unless  they  would  extend  their  track  out  here,  but  the 
Illinois  Traction  System  runs  way  out  in  here.  It  would 
be  easier  for  them  to  make  a loop  and  come  along  on 
their  right  of  way,  and  also  in  here  in  the  city  loop  up  to 
23d  street.  You  see  they  have  a loop  here  which  they 
could  extend  very  easily  farther  up  in  the  north  end  of 
town,  where  the  East  St.  Louis  & Suburban  only  comes 


475 


to  21st  street,  and  the  Illinois  Traction  runs  to  23d  street, 
but  from  23d  street,  and  again  on  out  here  we  have  no 
street  car  service  at  all. 

Chairman  Wilkerson : Is  there  anything  further  rela- 
tive to  this  situation  that  you  desire  to  submit? 

A.  No;  that’s  all  I think. 

Chairman  Wilkerson:  Any  further  questions  from 
this  witness? 

Mr  Alschuler:  That’s  all. 

Chairman  Wilkerson : Call  your  next. 


J.  H.  Holbrook,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 

chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  Will  you  state  your  name,  your  residence  and  busi- 
ness? 

A.  J.  H.  Holbrook,  Springfield,  Illinois,  vice-presi- 
dent of  the  Springfield  Marine  Bank. 

Q.  How  long  have  you  been  engaged  in  business  as  a 
banker? 

A.  Fifteen  or  eighteen  years. 

Q.  Have  you  had  any  connections  with  any  other 
banks  other  than  the  Springfield  Marine? 

A.  Yes. 

Q.  What? 

A.  National  City  Bank  of  New  York. 

Q.  In  what  capacity  were  you  connected  with  the  Na- 
tional City  Bank  of  New  York? 

A.  Assistant  vice-president. 

Q.  Mr.  Holbrook,  have  you  had  submitted  to  you  this 


476 


question,  entitled  ‘^Questions  to  bankers”  that  has  been 
submitted  to  other  bankers  previously? 

A.  Yes,  I had  some  questions  submitted  to  me  which 
I haven’t  before  me  now. 

Q.  But  you  have  in  mind  the  statement  which  you 
desire  to  make,  I take  it,  in  connection  with  this  general 
hearing  we  are  having  here? 

A.  Yes. 

Q.  Will  you  please  make  that  statement? 

A.  Will  you  please  let  me  have  the  first  question? 

Q.  Yes.  (Handing  paper  to  witness.) 

A.  This  first  question*  refers  to  the  amount  of  capital 
demanded  by  industrial  concerns  and  by  public  utilities. 
That  demand  is  unlimited  at  the  present  time  and  has 
been  for  a considerable  length  of  time  past.  Industrial 
concerns  are  seeking  new  capital  all  the  while.  They  are 
also  endeavoring  to  transfer  their  borrowed  money  obli- 
gations into  fixed  capital.  Probably  this  is  occasioned  to 
quite  an  extent  by  the  uncertain  conditions  of  the  time, 
and  those  that  are  cautious  are  seeking  to  convert  that 
kind  of  obligation  into  a fixed  capital  obligation. 

The  public  utility  companies  have  been,  seeking  cap- 
ital for  a great  length  of  time,  and  the  demand  comes 
from  all  over  the  country.  When  I was  in  New  York, 
where  I was  until  a couple  of  weeks  ago,  we  used  to  come 
in  contact  with  them  to  quite  an  extent.  Many  applica- 
tions for  funds  were  presented,  but  general  conditions, 
affecting  these  companies  made  the  business  unattractive 
as  a rule.  One  loan  was  brought  out, — on  notes, — shortly 
before  I left  there,  and  the  rate  to  the  investor  was  8^ 
per  cent.,  and  it  was  attractive.  The  attraction  about  it 
was  that  the  company  was  in  the  traction  business  and 


477 


the  electric  business  and  had  considerable  business  in 
the  way  of  selling  power  to  private  concerns,  so  that  it 
made  it  desirable. 

Those  concerns  which  are  doing  strictly  a utility  busi- 
ness find  it  very  difficult  indeed  to  get  any  money.  In 
fact,  it  is  almost  impossible.  They  are  not  showing  the 
earnings  that  are  necessary  and  the  public  is  not  inter- 
ested in  the  bonds. 

There  has  been  a good  deal  of  talk  about  what  the  pres- 
ent interest  rates  for  permanent  financing  are.  In  some 
instances  those  rates  have  been  to  the  companies  ap- 
proximately 9 per  cent.,  but  unfortunately  too  many  of 
the  companies  couldnT  get  any  financing  done  even  if 
they  did  pay  a 9 per  cent.  rate.  There  was  no  one  who 
would  buy  the  bonds,  and  it  doesn’t  make  much  difference 
what  the  rate  is  if  their  securities  lack  a market. 

The  next  question  is,  what  rate  of  return  must  utility 
properties  earn  in  order  to  attract  new  capital?  My 
view  of  that,  of  course,  is  that  they  should  average  at 
least  approximately  double  the  amount  of  the  interest 
charges,  and  that  is  after  taking  care  of  the  proper  de- 
preciation. That  rate  of  return  your  Commission  would 
have  to  fix. 

It  would  seem  to  me  that  there  is  a way  out  of  this 
difficulty.  It  is  true  that  the  utility  companies  have  suf- 
fered from  political  attacks  of  various  kinds  and  a senti- 
ment has  been  created  against  them.  Perhaps  they  de- 
serve it  for  some  things  that  occurred  in  the  past,  but 
at  any  rate  the  attitude  of  mind  does  exist  in  the  invest- 
ing public  that  such  securities  are  not  safe  investments, 
and  that  something  is  liable  to  happen  to  them  further 
affecting  the  values. 


478 


It  has  always  seemed  to  me  that  just  such  a commis- 
sion as  this  one  here  has  it  in  their  power  to  change  that 
condition  of  affairs.  If  it. can  get  the  idea  to  the  public, 
and  it  can,  that  the  State  Public  Utilities  Commission 
is  going  to  regulate  rates  so  that  the  companies  can  earn 
a living  income,  that  is  about  all  the  answer  that  is  nec- 
essary in  regard  to  the  securities.  If,  on  the  other  hand, 
the  State  Public  Utilities  Commission  does  not  arrange 
for  that  and  the  companies  are  subject  to  competition 
and  persecution  of  various  kinds,  chiefly  political,  the 
public  does  not  want  to  come  in  and  buy  the  bonds.  But 
I believe  as  much  as  I believe  anything  that  the  State 
Public  Utilities  Commission  of  Illinois  can  change  the 
whole  situation  in  regard  to  utility  companes  financing, 
and  that,  of  course,  is  what  I would  be  glad  to  see  done. 

The  next  question  is,  would  living  conditions  and  the 
general  business  situation  in  the  City  of  Springfield  be 
affected  by  the  inability  of  public  utililties  to  secure  cap- 
ital for  extensions  and  betterments?  Of  course,  there 
is  no  question  about  that.  We  are  all  of  us  dependent 
upon  the  public  utilities  for  much  of  the  business  we  do. 
When  we  want  an  additional  telephone  or  want  a new 
telephone,  whether  it  is  in  an  office  or  a residence,  we 
don’t  want  to  wait  until  the  company  can  get  the  money 
to  build  a new  switchboard  to.  put  in  the  additional  or 
new  telephone.  We  want  it  immediately.  It  is  an  impor- 
tant thing  to  have  the  service  when  you  need  it.  The 
same  way  with  the  street  cars.  If  the  properties  are  al- 
lowed to  depreciate  because  the  money  for  upkeep  is 
lacking,  it  affects  seriously  every  part  of  the  city,  and  its 
people.  I don’t  know  that  there  is  anything  more  that 
I care  to  say. 

Commissioner  Lucey:  You  think,  Mr.  Holbrook,  that 


479 


the  public  would  be  willing  to  pay  for  the  cost  of  the 
service  if  it  got  the  right  kind  of  service? 

A.  I think  it  would.  I think,  however,  before  it  is 
willing  to  do  that,  it  needs  to  have  something  that  it  feels 
that  it  can  depend  upon  as  being  honest  and  authoritative 
in  regard  to  the  necessity.  In  other  words,  I think  it 
needs  the  consideration  of  just  such  a commission  as  this 
to  establish  the  fact,  that  the  increase  is  needed. 

You  spoke  a few  moments  ago  with  Mr.  Jones  in  re- 
gard to  the  increase  in  railroad  rates.  The  government 
did  operate  the  railroads  for  a period  of  time  during  the 
war.  and  it  was  well  advertised  that  the  rates  were  not 
sufficient  to  take  care  of  the  increased  cost.  People, 
whether  they  want  to  pay  more  rates  or  not,  know  that 
it  is  inevitable  and  must  come,  and  they  accept  the  in- 
formation that  comes  from  the  government  and  with  the 
stamp  of  government  authority  on  it.  Now,  then,  in  the 
State  of  Illinois,  if  that  information  is  given  out,  whether 
it  is  the  company  in  Springfield  or  whether  it  is  the  com- 
pany in  Chicago,  or  wherever  it  is,  that  that  company 
must  have  higher  rates  in  order  to  take  care  of  the  ordi- 
nary requirements  of  the  business  it  will  carry  with  it 
authority  and  it  seems  to  me  that  that  is  an  answer  on 
that. 

Chairman  Wilkerson:  Any  further  questions  from 
this  witness? 

Mr.  Alschuler:  No. 

Chairman  Wilkerson : Call  your  next. 


480 


C.  P.  Summers,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 

chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  Please  state  your  name,  your  residence  and  your 
business,  Mr.  Summers? 

A.  C.  P.  Summers,  residence  Springfield,  Illinois; 
treasurer  of  the  John  Bressmer  Company,  a department 
store  corporation  in  this  city. 

Q.  Mr.  Summers,  you  are  familiar  with  the  scope  of 
this  hearing,  are  you  not! 

A.  Yes,  sir  in  a general  way. 

Q.  Will  you  please  state  what  you  have  to  state  con- 
cerning this  matter  from  your  standpoint  as  a business 
man! 

A.  Well,  there  have  been  submitted  to  me  three  ques- 
tions which  from  their  tenor  I assume  I am  supposed  to 
answer  from  the  standpoint  of  the  commercial  interests 
as  well  as  I can.  The  first  question  they  have  here  is, — 
what  is  the  situation  with  reference  to  a demand  for  pub- 
lic utility  service  such  as  extensions  of  electric,  gas,  rail- 
way and  telephone  service!  Of  course,  there  has  always 
been  a demand  for  extensions  and  betterments  of  the 
service  of  those  utilities  which  I think  it  has  in  normal 
times  taxed  the  companies  to  meet,  and  equally  of  course 
at  this  time,  when  the  difficulties  are  enhanced  by  the 
possible  war  conditions,  the  demand  is  considerably 
greater  than  it  normally  would  be; 

In  every  community  with  which  I have  had  any  experi- 
ence the  development  of  the  community  has  been  very 
largely  dependent  upon  the  wholesome  development  of 
the  utilities.  It  is  true  in  this  community  that  the  very 


481 


bad  housing  conditions  which  exist  here  would  be  ma- 
terially improved  if  the  utilities  were  available  to  a great 
many  tracts  of  land  fit  for  development  that  the  utilities 
are  not  now  available  to.  I have  in  mind  particularly  a 
large  tract  of  land  which  lies  in  the  north  part  of  this 
city  which  is  suffering  badly  for  want  of  water,  gas, 
street  railway  and  electric  facilities.  I know  owners  of 
land  in  that  tract  who  would  be  very  glad  to  build  at  this 
time  five  or  six  room  houses  on  it  if  those  utilities  could 
be  made  available  in  it.  It  is  obvious  that  if  the  utilities 
were, — if  there  was  ever  any  demand  for  extensions  and 
betterments  of  utilities  that  that  demand  is  now  very 
great  indeed. 

The  second  question  is,  would  living  conditions  and  the 
general  business  situation  in  your  city  be  affected  by  the 
inability  of  public  utilities  to  secure  capital  for  exten- 
sions and  betterments?  The  only  answer  is,  of  course, 
living  conditions  and  business  conditions  would  be  very 
seriously  handicapped  if  utility  companies  should  not  be 
provided  with  capital  enough  for  extensions.  The  serv- 
ice furnished  by  the  utility  companies  is  essential  to  the 
welfare  and  the  comfort  and  convenience  of  the  people, 
and  if  any  substantial  number  of  the  people  are  pre- 
vented from  having  those  comforts  and  conveniences  not 
only  the  welfare  of  the  people  but  the  general  business 
conditions  of  any  community  would  be  pretty  badly  re- 
duced, pretty  seriously  handicapped. 

The  third  question  is,  do  you  believe  that  the  matter 
of  high  class  efficient  service  is  paramount  with  the  com- 
mercial interests  of  the  state  to  that  of  rates?  I don’t 
think  there  is  any  question  in  the  world  about  that,  and 
I think  the  general  attitude  of  the  commercial  interests 
of  the  state  and  of  every  community  in  it  is  that  there 


482 


has  been  very  much  too  much  harping  about  the  rates 
which  the  utility  companies  charge.  Personally,  I have 
never  had  any  patience  with  that  thing  at  all,  and  I think 
the  average, — I know  in  the  average  business,  and  I know 
that  in  every  household  the  amount  of  money  which  is 
paid  out  for  utility  services  is  such  a small  proportion  of 
the  total  amount  of  expense  of  operation  .of  a business  or 
such  a small  proportion  of  the  general  household  budget 
that  it  is  very  difficult  to  understand  why  all  the  clamor 
has  been  made  about  rates. 

I think  if  the  Commission  could  bring  to  the  attention 
of  whoever  it  is  that  is  objecting  to  the  rates  the  right 
kind  of  a perspective  and  a strong  sense  of  what  a small 
amount  of  money  they  were  actually  paying  for  the  very 
great  benefits  that  are  being  given  to  them,  that  some  of 
the  people  who  are  making, — who  might  make  such  a 
clamor  about  the  rates  would  be  rather  mortified  to  realize 
that  they  had  made  such  a noise  about  such  a very  little 
thing  and  I think  that  is  the  attitude  of  the  commercial 
interests  in  general,  that  the  rates  charged  is  of  second- 
ary importance,  that  what  is  wanted  is  continuous,  high- 
class,  efficient  service,  and  I think  the  commercial  inter- 
ests are  well  aware  that  at  the  present  time  it  is  requir- 
ing from  two  and  a half  to  three  times  the  amount  of 
capital  to  operate  any  business,  including  the  utility  busi- 
ness, that  it  cost  prior  to  the  war  and  that  it  is  necessary 
for  utility  companies  to  raise  that  capital  from  some 
source. 

So  far  as  I know  there  are  only  three  sources  from 
which  capital  can  be  raised.  One  is  invested  capital,  an- 
other is  to  borrow  the  capital  and  the  third  is  from  the 
sales  or  profits  of  the  operation  of  the  business.  Of  course, 
it  is  obvious  that  capital  will  not  invest  unless  there  is 


483 


assurance  of  a reasonable  and  fair  return,  and  that  money 
cannot  be  borrowed  unless  the  borrower  is  reasonably  as- 
sured of  a fairly  profitable  operation.  And  I am  quite 
of  the  opinion  that  the  commercial  interests  of  this  state 
would  be  greatly  relieved  if  the  utility  question  could  be 
entirely  divorced  from  politics  and  the  utility  companies 
and  the  utility  securities  could  be  placed  on  a firm  finan- 
cial footing.  That  is  about  all  I want  to  say. 

Mr.  Alschuler : That’s  all  I have. 

Chairman  Wilkerson:  Any  further  questions? 

Commissioner  Lucey:  That  opinion  that  the  public 
would  be  willing  to  pay  the  cost  of  the  extensions  and  bet- 
terments if  they  received  the  service  also  applied  in  your 
opinion  to  the  City  of  Spring'field? 

A.  I am  quite  sure  that  with  the  necessity  for  the  pay- 
ment being  properly  submitted  to  the  people  that  they 
would  be  perfectly  willing  to  pay  for  it,  yes,  sir.  , 

Q.  Have  you  j^aid  any  attention  to  that  in  the  city 
here  in  the  last  few  years? 

A.  To  what,  general? 

Q.  That  situation. 

A.  Yes,  sir. 

Q.  You  know  the  City  of  Springfield  is  one  of  the  cit- 
ies especially  that  has  been  stirring  up  the  opposition  to 
the  utility  corporations  in  general,  and  utility  commis- 
sions in  general,  this  one  in  particular? 

A.  Are  you  speaking  of  the  City  of  Springfield  with 
respect  to  its  populace  or  with  respect  to  its  government? 

Q.  I don’t  know.  That  is  the  only  thing  I know  of  the 
city,  is  by  the  result  of, — 

A.  I am  of  the  opinion  with  respect  to  the  local  situa- 


484 


tion  that  some  of  the  people  of  the  community  have  been 
misled  with  respect  to  the  utility  company,  that  they 
have  not  understood  at  all  its  necessity  for  increased 
rates,  that  they  have  voted  and  talked  on  personalities 
and  not  at  all  on  reason. 

Q.  Your  statement  as  you  made  it  here  was  a rather 
interesting  and  lucid,  clear  exposition  of  the  situation 
and  about  as  my  own  judgment  of  the  people  of  Spring- 
field  indicated  was  the  truth,  but  I was  wondering  if  you 
had  ever  made  that  other  than  as  you  made  it  today  in 
this  room. 

A.  Made  what,  sir  ? . 

Q.  The  statement  you  made  here. 

A.  No,  sir,  I never  made  it. 

Q.  DonT  you  think  some  responsibility  rests  on  the 
business  element  of  the  city  to  see  that  the  proper  news 
is  spread? 

A.  A very  great  deal,  sir. 

Chairman  Wilkerson:  To  what  extent  have  the  busi- 
ness men  interested  in  the  maintenance  of  the  service 
devoted  their  energies  to  seeing  that  the  truth  is  known 
about  these  things  and  that  error  is  contradicted? 

A.  Little  or  none. 

Q.  What  do  you  think  about  the  necessity  for  their 
giving  some  time  to  it? 

A.  I think  they  could  be  of  very  material  assistance 
to  the  public  utility  commission  in  educating  the  people 
of  this  and  every  other  community  in  the  state  to  the 
conditions  as  they  exist. 

Commissioner  Lucey:  Not  to  the  Commission,  Mr. 
Summers,  but  to  themselves? 


485 


A.  Equally  to  themselves,  yes,  sir. 

Q.  To  the  state  at  large,  donT  yon  think! 

A.  Undoubtedly,  sir. 

Q.  This  is  a pretty  good  town  to  start  that  in,  donT 
you  think  so! 

A.  Yes,  sir. 

Q.  And  you  are  representing  one  of  the  big  commer- 
cial interests  in  the  city,  probably  one  of  the  biggest  re- 
tail merchants  in  centr^il  Illinois  ! 

A.  I suspect  that  I didnT  understand  your  inquiry 
when  I said  I hadnT  said  this  thing  before. 

Q.  Yes, — 

A.  I have  said  things  similar  to  that  many  times,  both 
publicly  and  privately,  but  I have  been  rather  lonesome 
in  my  effort. 

Q.  Much  misunderstanding  of  the  utility  situation  is 
due,  in  fact,  I might  say  all  of  it,  to  misunderstanding  of 
the  facts  ! 

A.  Yes,  sir;  and  in  many  instances  to  a wilful  misun- 
derstanding by  leaders,  and  the  public  utilities  of  this 
state  and  I think  of  every  state  in  the  Union  have  been 
viciously  attacked  and  unfairly  attacked  by  demagogues 
who  have  perpetuated  themselves  in  office  solely  by  in- 
flaming people  wrongfully  against  utility  companies,  and 
they  have  created  bad  political  situations  in  many  cities 
in  this  state  which  ought  to  be  corrected  at  this  time. 

Q.  Do  you  think  if  the  public  knew  of  the, — by  the 
public  I mean  the  public  in  general,  the  man  who  rides 
on  the  car  and  pays  the  nickel  or  who  pays  for  his  electric 
light  or  pays  for  gas  or  pays  for  water,  the  holdings  of 
banks,  of  insurance  companies  and  other  of  the  larger 


486 


institutions  in  public  utility  securities,  bonds  and  some- 
times stocks,  of  how  much  they  were  dependent  for  the 
safety  of  many  investments  like  life  insurance  and  other- 
wise, that  they  would  have  a clearer  idea  of  what  should 
be  fair  and  just  to  these  institutions? 

A.  I am  quite  sure  they  would,  provided  that  infor- 
mation were  given  to  them  in  words  of  one  syllable  and 
were  not  given  to  them  as  a mass  of  statistics.  It  is  very 
difficult  for  the  average  person  to  assimilate  and  under- 
stand figures  running  into  the  hundreds  of  millions  of  dol- 
lars, particularly  where  those  figures  are  in  large  num- 
ber,— I mean  where  there  are  a great  many  large  figures. 
But  if  the  people  can  understand  that  banks  and  insur- 
ance companies,  savings  banks  and  that  the  modest  in- 
vestors in  general  are  largely  interested  in  these  securi- 
ties and  that  because  of  the  fact  that  the  rates  have  been 
beaten  down  and  the  costs  have  greatly  increased  those 
securities  have  shrunk  in  value,  I am  quite  sure  that  the 
people  would  be  quite  willing  to  have  that  condition  cor- 
rected. I am  sure  they  would  because  it  is  right  that  it 
should  be. 

Commissioner  Lucey:  That’s  all. 

Mr.  Alschuler:  That’s  all. 

C.  B.  Cheadle,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 

chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  Please  state  your  name  and  residence,  Mr.  Chea- 
dle? 

A.  C.  B.  Cheadle,  Joliet,  Illinois. 

Q.  What  is  your  business,  Mr.  Cheadle? 


487 


A.  I am  secretary  and  treasurer  of  a number  of  inde- 
pendently owned  telephone  companies. 

Q.  How  long  have  you  been  connected  with  the  inde- 
pendent telephone  companies? 

A.  I have  been  quite  actively  connected  with  them  for 
at  least  15  years. 

Q.  Have  you  had  submitted  to  you  the  question  that 
was  propounded  to  operators, — perhaps  I had  better 
read  it  into  the  record  again.  1.  Will  you  state  the  sit- 
uation of  the  companies  which  you  represent  here  with 
regard  to  the  normal  growth  of  each  one  of  the  compa- 
nies? 2.  The  present  demand  for  extensions  and  enlarge^ 
ments?  3.  The  ability  to  meet  that  demand?  4.  The 
amount  of  new  capital  which  the  company  would  need  to 
build  the  necessary  extensions  to  its  plant?  5.  The  ex- 
perience which  you  have  had  in  attempting  to  secure  new 
capital, — and  make  such  other  observations  as  you  may 
care  to  in  connection  with  the  present  discussion? 

A.  I think  instead  of  answering  the  questions  ser- 
iatum  I might  answer  them  comprehensively  by, — 

Q.  By  in  a general  way? 

A.  I assume  one  reason  why  at  least  I have  been  asked 
to  testify  at  this  hearing  is  that  I represent  in  a way 
a class  of  public  utilities  that  are  to  some  extent  at  least 
separate  and  distinct  from  other  classes  which  have  re- 
ceived a larger  share  of  attention  at  this  proceeding  and 
preceding  hearings  than  the  particular  class  I represent. 
I assume  that  what  the  particular  facts  might  be  regard- 
ing the  particular  companies  that  I represent  would  be 
of  little  importance  in  this  hearing  but  I do  believe  that 
if  those  companies  are  typical  of  a large  number  of  other 
companies  and  the  conditions  affecting  them  are  similar 


488 


in  character  to  the  conditions  aiTecting  a large  number 
of  other  companies,  then  a discussion  of  the  matters  af- 
fecting the  particular  companies  with  which  I am  con- 
nected would  be  of  interest  to  this  Commission. 

Commissioner  Lucey : What  is  the  nature  of  the  com- 
panies you  are  interested  in,  Mr.  Cheadle! 

A.  The  companies  that  I am  interested  in  are  the 
smaller  independently  owned  telephone  companies.  First, 
I think,  just  in  a preliminary  way  it  might  be  well  to 
state  into  the  record  that  those  companies,  the  small  com- 
panies,— by  that  I mean  companies  operating,  we  will 
say,  up  to  three  thousand  stations, — comprise  the  great 
bulk  of  the  telephone  business  of  the  United  States,  at 
least  that  portion  of  the  telephone  business  designated 
as  the  independent  telephone  business,  which  as  a class 
represents,  I would  say,  at  least  one-half  or  more  of  the 
entire  business  of  the  country. 

Taking  our  own  state  as  an  illustration,  there  are  five 
hundred  or  more  of  these  independently  owned  prop- 
erties belonging  to  the  class  to  which  I refer  operating 
in  the  aggregate  a very  large  majority  of  all  of  the  tele- 
phone stations  throughout  the  state  if  we  shall  leave 
Chicago  and  Cook  county  out  of  consideration.  It  is  of 
those  interests  that  I would  speak  particularly  in  this 
hearing.  Those  companies  have  depended  for  their  finan- 
cial existence  upon  the  individual  efforts  of  the  men  di- 
rectly connected  and  concerned  with  the  companies  rather 
than  through  any  financial  organizations  engaged  in  the 
business  of  handling  securities.  Nearly  all  the  companies 
that  have  been  represented  directly  in  these  hearings 
have  been  those  of  such  financial  magnitude  and  sur- 
rounded with  such  conditions  as  have  enabled  them  to 
obtain  funds  in  the  past  and  presumably  in  the  present  or 


489 


future  through  recognized  tinancial  agencies.  That  is 
not  true  of  the  companies  that  I refer  to,  that  I represent. 

I have  organized, — I have  at  least  been  one  of  the  prime 
factors  in  the  financing  of  these  five  or  six  hundred  tele- 
phone properties  in  Illinois,  companies  representing  at 
least  a million  and  a half  of  capital  invested.  In  no  sin- 
gle instance  has  any  portion  of  that  capital  been  realized 
through  large  financial  organizations,  but  it  has  come 
directly  from  the  people,  so  that  I think  I may  say  without 
misstatement  that ' these  properties  are  essentially  the 
properties  of  the  people,  of  the  communities  in  which  the 
businesses  are  established.  They  have  been  organized 
and  their  organization  has  been  made  possible  through 
the  standing  and  the  personal  influence  of  the  men  who 
have  organized  the  companies  and  have  stood  back  of 
them  in  their  management  and  direction.  I believe  these 
companies  are  the  very  sinew  and  bone  of  the  utility 
businesses  of  this  state.  They  have  secured  their  capital, 
they  have  established  their  businesses  and  they  have 
operated  them  more  economically  and  more  efficiently 
and  to  a larger  tneasure  in  the  interest, — directly  in  the 
interest, — of  the  public  than  any  other  class  of  public  util- 
ity businesses.  Even  Mr.  Vail,  who  has  so  recently  died, 
and  Mr.  Kingsbury,  another  splendid  type  of  utility  man 
who  has  also  recently  passed  beyond,  told  me  personally 
repeatedly  that  the  smaller  independently  owned  tele- 
phone properties  know  the  needs  and  can  supply  those 
needs  in  the  local  communities,  the  smaller  cities  and 
towns  and  the  rural  districts  more  efficiently,  more  eco- 
nomically and  more  satisfactorily  than  the  Bell  Company 
can  do. 

I have  stated  that  the  ability  of  the  companies  to  which 
I refer  to  secure  the  funds  with  which  to  acquire,  extend. 


49Q 


enlarge  and  develop  their  several  businesses  has  been  due 
to  the  standing  of  the  individuals  connected  with  them. 
The  ability  of  those  men  to  secure  the  funds  has  also  been 
controlled  and  is  controlled,  of  course,  by  the  market 
value  of  money  as  a commodity.  Their  ability  to  secure 
the  funds  at  all  has  been  due  to  the  standing,  or  moral 
backing  at  least,  of  these  men.  Without  that  they  could 
not  have  obtained  the  funds  at  all.  In  securing  the  funds 
I wish  to  make  it  clear  that  moral  backing  has  not  enabled 
them  to  get  the  money  on  better  terms  than  those  more 
favorably  situated  companies  who  could  deal  through 
large  financial  organizations  such  as  the  Mississippi  Val- 
ley Trust  Company  whose  representative  has  testified  so 
interestingly  here  today.  These  companies  have  felt 
possibly  more  acutely  the  restrictions  and  limitations 
placed  upon  their  development  during  the  years  since  the 
war  began  than  those  larger  companies  whose  capital  has 
run  into  the  millions.  The  demands  of  the  rural  sections 
and  of  the  smaller  cities  and  towns  and  villages  has  been 
proportionately  greater,  the  demand  for  development, 
than  I believe  has  been  true  in  the  larger  centers.  In  my 
own  companies  at  least  we  have  been  and  are  at  this 
moment  confronted  with  large  demands. 

My  work  has  been  largely  that  of  reorganization.  A 
number  of  years  ago  I conceived  the  idea  that  the  second- 
ary stage  in  the  devolpment  of  the  telephone  business 
would  be  one  of  reorganization,  of  betterment,  of  sub- 
stitution of  the  better  for  the  less  efficient  equipment  that 
was  originally  installed.  So  I have  been  engaged  with  my 
associates  in  acquiring  run  down,  poorly  developed,  poor- 
ly managed  and  poorly  operated  telephone  properties 
with  the  view  of  their  enlargement,  the  extension  of  their 
facilities,  the  betterment  of  their  service  and  the  develop- 
ment of  their  business  along  commercial  lines. 


491 


We  have,  I believe,  well  constructed  properties,  gen- 
erally speaking.  I have  found  this  to  be  true,  that  even 
before  the  coming  into  existence  of  this  Commission 
wherever  we  took  over  and  acquired  a poorly  operated 
property  and  installed  efficient  service  and  injected  into 
it  efficient  management  with  consequent  efficient  service, 
that  the  question  of  rates  was  a very  secondary  one.  We 
largely  increased  our  rates  without  any  serious  opposi- 
tion, even  before  the  days  of  the  utilities  commission. 
Since  the  coming  into  existence  of  this  Commission  we 
have  found  the  same  conditions,  and  I emphasize  the 
fact  that  in  my  .opinion  any  company  that  will  adequately 
and  efficiently  serve  need  have  little  concern  as  to  the 
public  attitude  toward  that  company  as  to  any  charges  or 
exorbitant  rates  or  anything  of  that  sort.  What  the 
public  wants  is  service  and  they  are  willing  to  pay  any- 
thing that  is  fair  and  right. 

I have  had  city  officials  and  representatives  of  busi- 
ness organizations  appear  and  testify  before  this  Com- 
mission in  application  for  rate  increases.  I have  one  case 
in  mind  particularly  where  that  was  true. 

As  to  the  ability  of  the  class  of  companies  to  which  I 
refer  to  obtain  funds  I wish  to  say  that  since  the  first  of 
this  year  the  companies  that  I represent  have  secured  in 
round  numbers  $100,000  for  the  purpose  of  extensions, 
enlargements  and  development  of  their  properties.  It 
has  cost  us  from  ten  to  twelve  per  cent  to  obtain  those 
funds.  The  properties  I represent  will  need, — should 
have  this  year,  urgently  demand  for  this  year,  twice 
that  much  more.  We  expect  it  will  cost  us  anywhere 
from  eight  to  twelve  per  cent  to  obtain  that  money.  We 
expect  to  have  serious  difficulty  in  obtaining  it  at  those 
figures.  We  could  use  a great  deal  more  than  that  and 


492 


use  it  to  advantage  and  to  the  interest  of  the  public,  but 
our  policy  has  been  and  will  be  until  conditions  radically 
change  to  get  along  with  just  as  little  as  we  can  consist- 
ently with  the  maintenance  and  operation  of  our  prop- 
erty and  the  serving  of  the  public  adequately  and  effi- 
ciently. 

Commissioner  Dempcy:  Just  what  do  you  mean  by 
independently  owned  telephone  companies  1 I gather  gen- 
erally what  it  is  but  I want  it  more  specific  than  that. 

A.  There  are  two  great  systems  of  telephones  in  the 
United  States,  the  so-called  Bell  system  consisting  of 
thirty-five  or  forty  or  more  companies  owned  or  con- 
trolled directly  or  indirectly  by  the  American  Telephone 
& Telegraph  Company  constituting  one  system,  popular- 
ly known  as  the  Bell  Telephone  System,  and  the  other 
which  I have  designated  as  the  independently  owned 
properties  consisting  of  that  large  number  of  generally 
small  organizations  in  which  the  Bell  Company  or  its 
subsidiaries  own  no  interest  or  a minor  interest,  and  the 
ownership  of  which  is  lodged  in  a large  majority  of  cases 
among  the  citizens  of  the  communities  which  the  com- 
panies serve  respectively. 

I suppose  in  the  state  of  Illinois  there  are  fifty  thou- 
sand investors  residing  in  Illinois  who  have  an  interest 
in  the  so-called  independently  owned  telephone  properties 
to  which  I refer. 

Commissioner  Lucey:  What  is  your  basis  for  that 
estimate,  Mr.  Cheadle  ? 

A.  Figures  that  have  been  compiled  by  the  Illinois 
Independent  Telephone  Association.  We  at  various 
times  have  undertaken  to  ascertain  the  number  of  in- 
vestors and  our  best  information  is  that  that  estimate 
is  not  very  far  wrong. 


493 


Mr.  Alschuler:  Mr.  Cheadle,  let  me  ask  you  a ques- 
tion. When  you  say  that  you  have  raised  a hundred 
thousand  dollars  for  the  companies  that  you  have  been 
connected  with,  has  that  been  raised  entirely  on  the 
credit  of  those  companies  1? 

A.  Yes,  I would  say  that  is  true  with  the  moral  back- 
ing of  the  men  connected  with  them. 

Q.  It  has  been  largely  raised,  hasn’t  it,  right  in  the 
communities  where  the  companies  are  located? 

A.  In  the  communities  in  which  those  particular  com- 
panies were  located  or  in  other  communities  in  which  the 
men  identified  with  those  companies  have  also  telephone 
interests.  To  be  specific,  I am  interested  with  Mr.  Ster- 
rett,  with  whom  I am  associated,  and  other  men  in  prob- 
ably twenty  or  twenty-five  different  separate  communi- 
ties. We  have  secured  these  funds  from  those  twenty  or 
twenty-five  communities  although  the  funds  themselves 
perhaps  have  been  invested  in  three  or  four  of  those 
communities. 

As  a matter  of  information  and  as  showing  what  the 
conditions  are  confronting  our  particular  group  of  com- 
panies I will  just  say  this,  that  I have  made  a compilation 
of  the  revenues  of  those  companies  for  the  year  1919, 
and  I find  that  the  net  return  upon  the  values  of  the  prop- 
erties as  fixed  by  this  Commission  for  rate  making  pur- 
poses, or  in  cases  where  such  values  have  not  been  fixed, 
then  by  a fair  estimate  of  what  would  be  such  a rate  mak- 
ing base,  that  the  net  return  during  the  past  year  was 
almost  exactly  3%,  after  allowing  approximately  the 
amount  of  depreciation  that  the  Commission  has  set  up 
and  indicated  should  be  set  up  in  the  various  cases.  I 
would  modify  that  by  saying  after  setting  up  approxi- 
mately 75%  of  the  amount  of  the  depreciation  that  the 


494 


Commission  in  its  various  findings  has  indicated  should 
be  set  up  as  a reasonable  amount  for  depreciation  pur- 
poses. I might  add  to  that,  that  on  the  basis  of  what  we 
may  term  the  present  unrealized  expense  that  has  ac- 
crued during  the  year  1919  and  up  to  the  present  time 
of  1920,  while  I have  not  made  an  accurate  estimate,  my 
best  information,  and  belief,  is  that  on  the  basis  of  the 
rates  under  which  the  revenues  for  1919  were  realized 
that  we  would  not  break  even  in  the  matter  of  expense, 
taking  into  account  the  advanced  cost  of  labor  and  ma- 
terials that  has  occurred  and  which  I have  designated  as 
unrealized  expense. 

I want  it  understood  that  what  I have  said  I have 
attempted  to  say  not  with  regard  to  my  own  companies 
so  much  as  giving  consideration  to  conditions  which  I 
believe  are  general  and  as  affecting  all  companies  in  the 
class  to  which  I have  referred.  I believe  that  this  Com- 
mission has  done  a great  deal  in  the  matter  of  stabiliz- 
ing investments  in  this  particular  class  of  companies. 
I believe  it  is  capable  of  doing  a great  deal  more  in  that 
direction.  I believe  that  it  should  give  particular  atten- 
tion, and  I believe  the  companies  themselves  should  give 
much  more  attention  to  the  matter  of  public  education 
as  to  the  facts  about  the  business  than  has  heretofore  been 
done.  I believe  this  series  of  hearings  is  of  great  profit. 
I believe  that  similar  opportunities  for  public  investiga- 
tion should  be  utilized  in  the  future.  I believe  the  find- 
ings of  this  Commission  should  be  given  wider  publicity. 
I believe  the  facts  developed  in  these  hearings  should  be 
given  much  currency,  to  the  end  that  the  people  may  be 
informed. 

I was  an  admirer  of  Theodore  Roosevelt.  His  policy 
was  publicity,  and  I believe  that  is  largely  the  solution 


495 


of  the  misunderstanding,  the  misapprehension  and  the 
misjudgment  on  the  part  of  the  public  in  the  operation 
and  the  administration  of  the  utilities  law  by  this  Com- 
mission. 

Mr.  Alschuler : Mr.  Cheadle,  I just  want  to  ask  you  one 
question.  Will  you  please  name  the  principal  towns  in 
which  the  companies  that  you  are  interested  in  operate? 

A.  Dixon,  Illinois;  Abingdon,  Illinois;  Henry,  Illi- 
nois; Chillicothe,  Washington,  Clinton  and  a group  of 
exchanges  adjacent  thereto,  Sullivan,  Illinois;  Carlin- 
ville,  Virden,  Girard,  Gillespie.  Those  are  perhaps  the 
most  important. 

Mr.  Alschuler:  That’s  all. 

Chairman  Wilkerson:  Any  further  questions  of  Mr. 
Cheadle?  That  is  all,  Mr.  Cheadle.  Have  you  any  other 
witnesses? 

Mr.  Alschuler:  There  are  some  other  gentlemen  here 
who  wish  to  be  heard. 

Chairman  Wilkerson : Very  well,  we  will  take  a recess 
of  just  five  minutes. 

(Informal  recess  continuing  as  follows:) 

Chairman  Wilkerson : The  hearing  may  be  resumed. 

W.  H.  Colean,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworn,  was  examined  in 

chief  by  Mr.  Alschuler,  and  testified  as  follows: 

Q.  Mr.  Colean,  will  you  give  the  Eeporter  your  name 
and  your  residence  and  business? 

A.  W.  H.  Colean,  Peoria,  Illinois.. 

Q.  What  is  your  business,  Mr.  Colean? 


496 


A.  My  business,  investment  security  business. 

Q.  Have  you  ever  had  any  connection,  Mr.  Colean, 
with  any  civic  organization  in  Peoria? 

A.  Yes,  sir,  the  Peoria  Association  of  Commerce;  I 
was  president  of  it  in  1917. 

Q.  And  what  is  the  Peoria  Association  of  Commerce  ? 

A.  It  is  an  association  of  business  and  professional 
men  with  1,400  or  1,500  members. 

Q.  And  has  that  association  taken  any  action  what- 
ever regarding  public  utilities? 

A.  Yes,  sir,  they  have  repeatedly.  They  did  in  1918 
and  I think  they  passed  a resolution  at  that  time  re- 
questing the  Utility  Commission  to  grant  an  increase  in 
fare  for  the  street  railway  of  Peoria,  and  again  last 
week  the  matter  of  street  car  fares  came  up,  the  increased 
fares  for  public  service  corporations  was  brought  up  be- 
fore the  board  of  directors  and  a resolution  was  passed 
at  that  time. 

Q.  A resolution  to  the  effect, — or  have  you  that  reso- 
lution? 

A.  I have  a copy  of  the  resolution  here  and  I would 
be  glad  to  read  it.  This  resolution  was  passed  on  the 
13th  of  May,  1920.  The  resolution  without  the  pream- 
ble reads  as  follows : 

Whereas,  it  is  the  earnest  desire  of  the  business 
interests  of  this  City,  as  represented  by  the  Asso- 
ciation of  Commerce,  that  the  public  utilities  should 
receive  for  their  service  in  Peoria  and  vicinity,  rates 
which  mil  provide  sufficient  revenues  to  meet  oper- 
ating charges,  including  an  adequate  wage  scale  for 
its  employes,  and  thereafter  a fair  return  upon  the 
value  of  its  property,  said  value  to  be  decided  by  the 
utility  commission,  so  as  to  enable  them  to  obtain  ad- 
ditional capital  necessary  to  extend  the  facilities  to 


497 


meet  the  demands  of  the  community  for  additional 
and  efficient  service. 

Therefore  be  it  resolved,  that  without  committing 
ourselves  as  to  the  reasonableness  of  the  rates  pro- 
posed, that  if  after  a full  investigation  it  shall  be 
found  that  the  representations  of  the  public  service 
corporations  are  correct,  it  is  the  recommendation  of 
Peoria  Association  of  Commerce  that  the  Illinois 
Public  Utilities  Commission  authorize  a schedule  of 
rates  sufficient  to  meet  the  above  conditions. 

Be  it  further  resolved,  that  this  association  is 
opposed  to  any  increase  in  such  rates  unless  such 
investigation  discloses  that  an  increase  is  fair  and 
equitable  according  to  the  terms  and  spirit  of  this 
resolution.’’ 

That  resolution  was  brought  about  primarily  by  the 
fact  that  Peoria  at  that  time  was  in  the  midst  of  a strike 
of  the  employes  of  the  street  railway  company.  The 
operating  men  went  out  on  a strike  on  the  morning  of 
the  13th  and  since  that  time  we  have  not  had  a street  car 
in  operation  in  the  City  of  Peoria. 

Q.  The  13th  of  this  month? 

A.  The  13th  of  this  month.  Consequently,  from  the 
effect  of  the  strike  both  business  and  labor  is  suffering 
terribly  in  Peoria  at  this  time.  The  Association  of  Com- 
merce in  Peoria  have  every  confidence  in  the  world  in  the 
Illinois  Utilities  Commission  and  we  felt  that  this  matter 
should  be  passed  on  by  the  Commission.  We,  however, 
feel,  and  it  was  brought  out  in  the  investigation  made 
by  a committee  of  the  association  of  which  I was  a mem- 
ber, that  the  street  car  company  in  Peoria  is  absolutely 
unable  to  grant  any  further  increase  in  wages  to  their 
men  without  a corresponding  increase  in  fare  to  the  com- 
pany. The  figures  submitted  to  us  by  the  company  indi- 
cated, while  we  had  no  way  of  proving  the  reliability  of 
the  figures,  that  the  company’s  books  now  show  a deficit 


498 


of  something  like  $145,000.  During  the  period  of  time 
from  May  1st,  1918,  to  May  1st,  this  year,  the  company 
lost  in  operating  in  their  lines  in  the  city  something 
over  $13,000  regardless  of  the  fact  that  your  Commis- 
sion granted  them  an  increase  of  20  per  cent,  last  year. 

The  public  there  feel  that  the  public  service  corpora- 
tion should  be  allowed  to  charge  a sufficient  rate  to  enable 
them  to  meet  the  requirements  of  labor  and  also  to  earn 
for  themselves  a reasonable  income  upon  the  capital  in- 
invested  in  the  business,  and  the  Association  of  Com- 
merce have  taken  that  stand  as  is  indicated  by  the  resolu- 
tion which  I have  just  read,  and  that  resolution  was 
drafted  and  was  voted  on  by  the  directors  and  also  will 
be  the  policy  of  that  association  from  now  on.  That 
is  the  position  the  Association  takes  in  regard  to  all 
public  service  corporations  in  the  City  of  Peoria. 

Commissioner  Lucey:  Is  your  strike  still  on  I 

A.  The  strike  is  still  on  and  we  don’t  know  when 
it  will  be  over.  There  is  no  indication  at  the  present 
time  of  the  company  and  the  men  getting  together  on 
the  situation.  The  company  has  made  several  different 
propositions  to  the  men  in  the  way  of  increase  of  wage. 
Their  proposition,  however,  has  always  had  a string  to 
it  in  the  way  of  any  increase  in  wage  granted  would 
depend  entirely  upon  the  action  of  the  Utilities  Commis- 
sion in  granting  the  railway  company  an  increased  fare 
that  would  enable  them  to  pay  this  increased  wage.  The 
men  are  not  willing  to  accept  that.  They  are  not  willing 
to  wait  for  the  Commission  to  pass  upon  the  merits  of 
the  case,  and  they  demand  an  increase  of  about  85  per 
cent  over  their  present  wage  scale  which,  of  course,  the 
company  is  absolutely  unable  to  pay,  and  the  public  are 
not  willing  that  they  should,  but  the  public  are  willing 
that  the  employes  should  receive  a living  wage. 


499 


Q.  What  are  they  getting  now,  Mr.  Colean! 

A.  My  recollection  is  that  they  are  getting  now,  one 
year  men  I think  41  cents,  two  and  three  year  men  43 
cents,  and  the  men  that  have  been  in  the  service  longer, 
46  cents. 

Q.  What  are  they  asking! 

A.  They  are  demanding  now  a flat  increase  of  85  per 
cent. 

Q.  Has  the  company  made  them  any  offer! 

A.  Well,  I am  not  in  a position  to  answer  that.  I 
think  the  company  has  intimated  to  them  that  they  would 
pay  them  57^  cents,  hut  it  was  not  a clean  cut  otfer.  The 
offer  of  the  company  was  dependent  entirely  upon  se- 
curing a further  increase  in  fare. 

Q.  They  couldn’t  have  this  Commission  grant  them 
any  rate  on  fares  in  order  to  pay  wages.  They  have 
to  come  down  here  after  they  get  through  with  their 
contracts. 

A.  That  is  the  position  that  the  company  took  and 
also  the  position  of  the  committee  from  the  Association 
took  in  trying  to  bring  the  two  parties  together  in  an  ad- 
justment of  this  controversy.  We  tried  to  get  them  to 
continue  operations  and  present  their  case  to  the  Com- 
mission after  deciding  upon  a wage  scale  by  arbitration, 
but  the  men  were  not  willing  to  accept  that  situation  and 
would  not  do  it  and  ordered  a strike.  The  utilities  in 
Peoria, — the  street  railway  company  has  made  no  money, 
one  of  the  telephone  companies  has  been  in  the  hands 
of  a receiver.  The  receiver  has  been  recently  discharged 
which  would  indicate  that  the  public  utilities  in  our  city 
at  least  were  not  making  the  money  that  they  should 
make. 


500 


Q.  Do  they  work  on  the  eight-hour  day  up  there? 

A.  Nine,  I think. 

Chairman  Wilkerson : Somebody  handed  me  an  article 
from  a newspaper  that  appears  to  he  published  in  Peoria 
dealing  with  this  strike  situation  in  which  I find  the  fol- 
lowing : ^ ‘ The  public  utility  commission  may  have  served 
some  useful  purpose,  but  thus  far  it  is  not  apparent  to 
the  people  of  Peoria.  It  has  usually  operated  to  stand 
between  public  service  corporations  and  the  people.’’  Do 
you  think  that  fairly  represents  the  sentiment  of  the  peo- 
ple of  Peoria  ? 

A.  No,  sir,  I do  not.  I think  in  the  matter  of  the 
Public  utility  Commission  in  Peoria  you  would  find 
upon  investigation  that  the  business  people  of  Peoria 
would  stand  squarely  behind  the  rulings  of  this  Com- 
mission. 

Q.  Wlio  do  you  think  is  responsible  for  the  publication 
of  stuff  of  that  kind? 

A.  I am  very  sorry  to  say  that  I am  unable  to  an- 
swer. It  was  a very  unfair  publication.  It  does  not 
reflect  the  sentiment  of  the  citizens  of  Peoria,  particu- 
larly those  that  I have  been  brought  in  close  touch  with 
and  that  is  the  business  men  of  the  city. 

Q.  I don’t  know  what  paper  it  is. 

A.  May  I look  at  it  just  a minute?  (Looking  at  clip- 
ping.) I couldn’t  testify  positively,  but  I think  it  was 
printed  in  the  Peoria  Star,  the  administration  paper  of 
the  city. 

Q.  Nobody  is  quoted  there ; it  is  just  merely  an  expres- 
sion editorially,  I presume. 

A.  I think  there  is  this  about  the  Utility  Commission, 
as  has  been  testified  to  by  one  or  two  here  today.  I be- 


501 


lieve  that  you  gentlemen  can,  if  you  will  have  a hearing 
say  on  the  controversy  that  is  at  Peoria  right  now  and 
have  the  hearings  in  Peoria  where  you  could  reach  the 
public  that  it  would  go  a long  ways  toward  educating  the 
public  and  give  them  a better  understanding  of  the  sit- 
uation. There  is  not  enough  publicity  in  the  findings  of 
this  Commission  or  your  method  of  procedure.  The 
average  man  is  absolutely  ignorant  as  to  what  is  done. 

Q.  Well,  of  course,  we  are  circumscribed  a little  in 
that  respect  by  the  provisions  of  the  act  creating  the 
Commission.  The  statute  prescribes  the  manner  and 
method  of  our  hearings  and  our  findings  are  subject 
to  judicial  review.  It  is  not,  therefore,  always  possible 
to  deal  with  the  concrete  situation  without  gloves  as  it 
should  be  dealt  with.  You  have  at  least  to  preserve  the 
formalities  of  judicial  proceeding. 

A.  I understand  that,  but  I think  such  associations 
as  w*e  have  in  Peoria,  for  instance,  have  a great  infill ence 
on  the  public  mind.  Our  association  passed  this  resolu- 
tion and  it  was  immediately  given  to  the  press  and  the 
public  know  just  where  the  association  stands  and  the 
resolution  speaks  for  itself.  I think  it  shows  confidence 
in  this  Commission.  The  last  paragraph  there  of  the 
resolution  was,  I am  sorry  to  say,  insisted  upon  by  a 
hair-splitting  attorney  who  happened  to  be  a director 
of  the  association,  but  the  resolution  proper  voices  the 
sentiment  of  the  business  interests  of  Peoria  and  I think 
the  general  public,  and  I can  say  that  in  regard  to  the  in- 
creased fare  that  was  granted  by  this  Commission  last 
year  to  the  street  railway  company,  I never  heard  any 
criticism  of  the  Commission  whatever. 

Commissioner  Lucey:  It  is  six  cents  up  there  now? 

A.  Six  cents.  In  fact,  our  association  recommended 


502 


that  increase  and  gave  that  publicity  the  same  as  we 
have  this  resolution  here. 

Chairman  Wilkerson : Do  you  think  it  would  be  help 
fill  when  the  time  comes  for  a hearing  in  that  mattei 
to  have  the  hearing  in  Peoria  if  possible? 

A.  I think  so,  just  simply  for  the  information  of  the 
public.  I didn’t  know  myself  the  condition  of  the  street 
car  company  till  I was  mixed  up  in  the  matter  by  serv- 
ing on  that  committee. 

Q.  Of  course,  it  is  fair  to  say  we  have  always  ap- 
preciated the  desirability  of  having  hearings  whenever 
possible  in  the  community  which  is  concerned  in  the  out- 
come of  the  litigation,  but  in  that  we  are  also  limited  by 
time  at  our  disposal  and  by  the  number  of  cases  on  the 
• docket,  and  particularly  in  the  last  year  by  the  tremen- 
dous volume  of  work  which  has  made  that  almost  pro- 
hibitive except  in  exceptional  cases. 

A.  I understand  that,  but  still  these  utilities  are  up 
against  a hard  proposition.  The  utilities  all  over  this 
country  have  been  the  political  footballs  and  will  con- 
tinue to  be  political  footballs  if  we  get  back  to  the  old 
home  rule  proposition.  The  organization  of  the  public 
utilities  commission  is  one  of  the  best  things  that  the 
State  of  Illinois  ever  did. 

Q.  I have  no  doubt  that  the  Commission  would  be 
very  glad  to  give  the  situation  in  Peoria  when  the  time 
comes  most  careful  consideration. 

A.  I wish  it  could  be  done.  It  would  enlighten  the 
public  there  more  than  anything  that  could  be  done.  The 
average  man  will  not  read  the  findings  of  this  Commis- 
sion or  any  other  commission  if  they  are  not  really  in- 
terested in  the  matter  that  is  under  controversy. 


503 


Commissioner  Lucey : We  didn’t  know  anything  about 
that  strike,  not  that  it  made  any  difference  to  us,  but 
we  didn’t  know  the  facts  as  to  the  strike. 

Chairman  Wilkerson:  There  has  been  no  application 
made  to  the  Commission  yet  touching  on  the  situation. 

A.  The  railways  company  has  notified  the  mayor  and 
the  city  council  that  they  intend  to  make  application  to 
the  Commission  for  an  increase  in  rates  and  that  will 
come  before  you  before  very  long  undoubtedly  because  it 
is  very  doubtful  whether  the  situation  can  be  cleared  up 
there  until  such  a time  as  there  is  a hearing  in  that  con- 
troversy. The  men  claim  that  they  will  not  go  to  work 
and  are  picketing  the  carbarns.  The  public  is  walking 
while  the  strike  is  going  on  and  business  is  suffering  as 
well  as  labor. 

Chairman  Wilkerson:  Any  further  questions? 

Mr.  Alschuler : That  is  all  I have. 

Chairman  Wilkerson : Call  your  next  witness. 


F.  A.  Tissier,  called  as  a witness  on  behalf  of  the  utili- 
ties, having  been  first  duly  sworu,  was  examined  in 
chief  by  Mr.  Alschuler,  and  testified  as  follows: 

Q.  Will  you  give  your  name  to  the  Reporter,  Mr. 
Tissier? 

A.  F.  A.  Tissier. 

Q.  What  is  your  residence,  Mr.  Tissier? 

A.  East  St.  Louis. 

Q.  And  your  business  or  occupation? 

A.  Secretary  of  the  retail  merchants’  association. 

Q.  Of  what, — j 


504 


A.  Of  Illinois  and  the  local  secretary  at  East  St. 
Louis. 

Q.  Mr.  Tissier,  you  are  familiar  to  a greater  or  less 
extent  with  the  purpose  of  this  hearing  before  the  Com- 
mission and  what  its  nature  is,  are  you  not? 

A.  Yes,  sir. 

Q.  Will  you  make  such  statement  as  you  care  to  make 
to  the  Commission  concerning  this  particular  hearing  and 
anything  you  may  care  to  state  concerning  its  local  ap- 
plication to  East  St.  Louis? 

A.  East  St.  Louis  with  its  present  facilities, — street 
cars,  has  got  to  the  point  where  it  is  absolutely  necessary 
that  some  relief  be  given  in  the  matter  of  increased  serv- 
ice. We  have  a city  that  is  stretched  out  in  three  di- 
rections, easterly,  southeasterly  and  northerly.  We  real- 
ize the  necessity  and  have  realized  it  for  some  time  of 
having  a cross  town  car  line  put  through  there.  We 
have  through  our  organizations  taken  the  question  up 
with  the  street  car  officials,  and  they  have  always  come 
back  with  the  plea  that  they  are  not  financially  able  to 
make  the  needed  improvements. 

A short  time  ago  we  had  a new  organization  that 
sprung  up  to  do  some  city  planning  among  other  things. 
The  report  is  just  about  completed  and  I understand 
Mr.  Bartholomew,  the  St.  Louis  engineer,  has  made  quite 
extensive  plans  for  improving  the  street  car  system  re- 
lieving the  congestion.  On  the  point  of  congestion  I 
might  say  that  practically  all  the, — ^in  fact  all  the  car  lines 
must  go  down  one  street  to  reach  the  City  of  St.  Louis, 
their  terminus,  and  in  the  planning  that  he  has  done, 
which  is  very  extensive,  he  makes  provisions  for  relief 
on  certain  line^  to  come  down  on  certain  streets,  and 


505 


we  ask  the  Commission  to  carefully  consider  these  things 
and  particularly  the  cross  town  car  line. 

Now,  we  have  in  the  northern  end  of  the  city  people 
residing  there  having  their  own  little  homes  and  also  in 
the  extreme  eastern  end.  They  are  compelled  to  come  all 
the  way  downtown  at  a transfer  point  and  go  probably 
half  the  distance  out  towards  their  home  in  another  direc- 
tion to  reach  their  place  of  employment.  We  believe  and 
we  know  with  a cross-town  car  line  in  there  that  it  is 
possible  to  get  people  to  work  in  perhaps  half  or  less 
time.  In  some  instances  it  is  taking  from  thirty  to  forty- 
five  minutes,  where  the  time  could  be  cut  down  almost 
half,  and  as  far  as  the  rates  are  concerned,  the  business 
men  of  East  St.  Louis  are  particularly  interested  in  serv- 
ice, and  we  believe  in  the  judgment  of  this  Commission, 
that  they  are  capable  of  determining  what  should  be  a 
fair  rate.  We  believe  after  you  make  a thorough  survey 
of  all  the  properties  that  you  will  arrive  at  a fair  valua- 
tion and  we  will  be  well  satisfied  with  whatever  rates  you 
place.  That  is  all. 

Q.  Have  you  anything  to  say,  Mr.  Tissier,  or  has  your 
attention  ever  been  called  to  the  situation  with  respect 
to  other  utilities  in  East  St.  Louis  as  to  their  needs? 

A.  The  water  companies  and  others,  you  mean? 

Q.  Gas  and  telephone  and  electric. 

A.  No ; they  have  not  been  called  to  my  attention  as 
strongly  as  the  street  car  situation. 

Mr.  Alschuler : I think  that  is  all  I care  to  ask. 

Chairman  Wilkerson : Any  further  questions  from  this 
witness?  If  not,  you  may  call  your  next  witness. 


506 


A.  T.  Spivey,  called  as  a witness  on  behalf  of  the  utilities, 

having  been  first  duly  sworn,  was  examined  in  chief  by 

Mr.  Alschuler,  and  testified  as  follows: 

Q.  Will  you  state  your  name  for  the  record,  Mr. 
Spivey  ? 

A.  A.  T.  Spivey. 

Q.  And  what  is  your  residence  and  business,  Mr. 
Spivey  ? 

A.  East  St.  Louis,  Illinois. 

Q.  What  is  your  business? 

A.  Publisher. 

Q.  Newspaper  publisher? 

A.  Yes,  sir. 

Q.  Do  you  hold  any  official  position  in  any  organiza- 
tion of  newspaper  men  ? 

A.  I am  president  of  the  Illinois  Editorial  Associ- 
ation. 

Q.  You  are  familiar,  are  you  not,  Mr.  Spivey,  in  a 
general  way  with  the  scope  of  this  hearing? 

A.  Yes,  sir. 

Q.  You  also,  I take  it,  are  familiar  with  the  situation 
regarding  utilities  in  your  home  city? 

A.  Yes,  sir. 

Q.  Have  you  any  opinions  that  you  care  to  express 
generally  or  with  respect  to  the  application  of  the  situa- 
tion in  East  St.  Louis,  regarding  all  or  any  of  the  utili- 
ties? 

A.  Well,  I don’t  know  that  I have  any  suggestions  to 
make  except  as  relates  to  the  street  car  service  there. 


507 


Q.  The  street  car  service,  I take  it,  is 

A.  I think  the  water  company  and  the  telephone  com- 
pany have  recently  gotten  some  relief  from  the  Commis- 
sion, but  the  street  car  company  is  operating  now  under 
a temporar}^  increased  fare. 

Q.  What  is  the  present  fare  there?  ' 

A.  Six  cents. 

Q.  And  when  was  it  granted,  do  you  remember? 

A.  I think  about  1918  sometime,  two  years  ago. 

Q.  Do  you  know  what  the  present  population  of  East 
St.  Louis  is? 

A.  No,  I do  not,  except  I have  had  an  intimation  from 
the  census  enumerator  it  is  about  68,000. 

Q.  Does  that  show  an  increase? 

A.  Yes. 

Q.  Of  how  much? 

A.  Well,  about  10,000.  That  does  not  include  the  im- 
mediate neighborhoods  which  are  supplied  by  the  street 
car  company,  perhaps  a total  of  about  75,000,  taking  in 
the  immediate  suburbs. 

Q.  Well,  generally,  what  is  the  situation  there  at  East 
St.  Louis  regarding  the  service  and  the  necessity  for 
extensions  or  improvements  and  so  forth? 

A.  Well,  the  street  car  service  in  East  St.  Louis  is  not 
sufficient.  Mr.  Tissier  has  told  you  something  about  the 
survey  of  Mr.  Bartholomew  which  was  made,  I think, 
at  the  suggestion  of  one  of  the  civic  organizations  in 
which  he  recommends  a cross-town  line.  The  four  street 
car  lines  in  East  St.  Louis  run  from  the  various  portions 
of  the  .city,  from  various  directions,  all  run  to  the  Eads 
Bridge,  perhaps  better  described  as  running  into  the  neck 


508 


of  the  bottle.  The  principal  industries  of  the  city  lie  out 
away  from  the  bridge.  In  order  to  get  from  one  part  of 
the.  city  to  the  other  they  must  come  down  town  and 
transfer  from  the  particular  transfer  center  and  go  back 
out.  The  survey  shows  the  need  of  this  cross-town  line. 
As  publisher  of  a newspaper  there  I have  been  insisting 
upon  this  being  done.  The  street  car  company  insist  that 
they  can’t  make  an  improvement  of  that  kind  without 
additional  revenue.  They  tell  me  that  they  can’t  bor- 
row the  money  for  an  improvement  of  that  kind.  They 
can  only  borrow  in  what  they  call  short  loans  and  can’t 
make  improvements  with  that  kind  of  money.  The  city 
is  making  some  extensive  improvements  in  the  way  of 
paving  streets  and  re-surfacing,  which  necessitate  the 
street  car  company  rebuilding  their  trackage.  Some  of 
these  improvements  can’t  be  carried  out  for  the  reason 
that  the  street  car  company  contends  they  have  no  money 
to  make  these  improvements.  Those  are  the  two  prin- 
cipal handicaps  in  the  street  car  service.  The  equipment 
they  have  is  in  fairly  good  condition  but  they  don’t  have 
enough  cars  for  the  busy  hours  in  the  mornings  and  even- 
ings. 

Q.  Is  there  any  considerable  construction  or  growth 
in  the  factories  in  East  St.  Louis? 

A.  The  secretary  of  the  chamber  of  commerce  told  me 

a f^w  days  ago  that  there  were  enough  new  factories 
and  additions  to  old  factories  to  employ  about  6,000  men 
now  under  construction  to  be  completed  some  time  this 
summer. 

Q.  This,  of  course,  would  require  additional  public 
utility  facilities,  would  it  not? 

A.  Yes,  sir,  and  require  additional  labor  and  more 
people  to  move  into  the  community. 


509 


Q.  Let  me  ask  you  with  respect  to  the  attitude  of 
the  people  of  East  St.  Louis,  that  is,  as  you  judge  it. 
In  your  opinion  are  they  more  deeply  concerned  with 
service  or  with  rates? 

A.  I think  service.  Of  course,  there  are  people  in  our 
community  opposed  to  any  increase  in  street  car  fares. 
They  would  be  opposed  to  it  under  any  circumstances, 
but  as  a general  proposition  I think  the  people  in  our 
community  would  be  perfectly  agreeable  to  any  rate  of 
fare  sufficient  to  make  these  extensions  and  allow  the 
company  a fair  return  on  the  reasonable  valuation  of  their 
property.  I think  one  thing  perhaps  that  has  hindered 
an  agreement  upon  rates  has  been  the  fact  that  they 
have  not  been  able  to  agree  upon  a fair  valuation  of  the 
property.  The  Utilities  Commission,  I think,  at  one  time 
made  a valuation  and  the  company  made  one,  but  as 
far  as  I know  they  have  not  been  able  to  agree  and  fix 
a valuation  on  the  property. 

Chairman  Wilkerson:  There  is  a case  now  on  hearing. 

A.  I think  so.  That  is  what  I understand. 

Mr.  Alschuler:  Is  there  anything  further  you  care  to 
state,  Mr.  Spivey? 

A.  No.  I think  if  they  could  agree  upon  that  propo 
sition  that  the  people  there  generally  speaking  would 
gladly  approve  any  rates  sufficient  to  permit  the  com- 
pany to  make  these  improvements  and  pay  a reasonable 
margin  of  profit  on  their  investment. 

Mr.  Alschuler : That  is  all  I have  to  ask. 

Chairman  Wilkerson:  Any  further  questions  to  be 
put  to  Mr.  Spively?  You  may  call  your  next  witness,  Mr. 
Alschuler. 


510 


Charles  A.  Noble,  called  as  a Avitiiess  on  behalf  of  the 

utilities,  having  been  ,tirst  duly  sworn,  was  examined 

in  chief  by  Mr.  Alschuler,  and  testified  as  follows : 

Q.  Will  you  give  the  reporter  your  name,  your  resi- 
dence and  your  business  or  occupation? 

A.  Charles  A.  Noble,  Joliet,  real  estate  dealer  and 
broker;  also  a holder  of  a county  office,  county  auditor, 
at  the  present  time. 

Q.  Do  you  hold  any  official  position  with  any  asso- 
ciation ? 

A.  I am  president  of  the  Joliet  Real  Estate  Board, 
have  been  president  since  its  organization. 

Q.  Mr.  Noble,  you  are  familiar,  are  you  not,  with  the 
nature  of  this  hearing;  you  have  been  in  this  room  all 
day? 

A.  Been  here  all  day  and  been  very  much  interested 
in  this  discussion,  yes,  sir. 

Q.  Will  you  state,  Mr.  Noble,  what  your  views  are 
concerning  the  questions  under  discussion? 

A.  It  seems  to  me  that  the  most  urgent  need  of  the 
hour  is  a publicity  department  to  acquaint  the  people  with 
the  real  truth  of  the  situation.  I believe  that  the  public 
generally  are  disposed  to  be  fair  toward  public  utilities 
but  they  have  not  the  correct  information.  I might  add 
also  that  promulgating  the  real  truth  in  this  matter  is 
the  most  difficult  form  of  advertising.  You  will  note,  of 
course,  that  an  unfavorable  report  about  a utility  does  not 
need  or  require  any  expense  to  circulate  throughout  the 
community,  while  it  is  extremely  difficult  to  circulate  the 
truth  which  people  don’t  want  to  hear.  I don’t  know 


511 


just  how  you  can  hande  that  proposition.  I have  heard 
some  suggestions  here  today  about  the  business  men 
taking  hold  of  this  subject.  My  observation  of  men  in 
commercial  business  is  that  they  are  somewhat  reluctant 
about  taking  sides  in  a disputed  controversy  on  public 
questions.  In  other  words,  there  is  more  or  less  cowardice. 
I think  you  have  had  some  witnesses  here  today  who 
have  shown  their  pubic-spiritedness  by  coming  to  the 
fornt  and  stating  to  you  just  how  they  felt  on  tnis  public 
question.  I don’t  know  whether  it  is  a common  occur- 
rence with  this  Commission  or  not.  I trust  that  it  is. 

Commissioner  Lucey:  It  is  the  exception. 

A.  I have  been  engaged  in  the  buying  and  selling  of 
real  estate  in  our  city  forty  years  and  upwards,  have 
seen  our  city  grow  from  eight  or  ten  thousand  to  sixty 
thousand,  together  with  its  immediate  suburbs  and  I 
have  had  some  occasion  to  observe  and  know  the  reasons 
for  this  growth  and  success,  and  I attribute  a very  con- 
siderable part  of  the  success  of  our  community  to  its 
public  utilities,  and  I think  it  is  extremely  important  that 
our  public  utilities  be  permitted  to  live  and  to  serve  the 
people  in  the  best  possible  manner,  and  I think  that  when 
the  public  understand  what  the  situation  is  that  they  will 
be  willing  to  support  our  public  utilities  more  cheerfully 
than  they  have  on  all  occasions. 

Mr.  Alschuler:  Well,  you  believe,  then,  Mr.  Noble,  I 
take  it,  that  there  is  some  real  need  for  relief  to  be  af- 
forded to  utility  companies! 

A.  Now,  I am  not  posted  as  an  expert  on  the  tech- 
nical questions  involved  in  this  hearing.  I take  it  that 
this  board  has  very  complete  data  and  information  on 
all  of  the  questions  involved,  and  personally  I have  great 
confidence  that  they  will  exercise  good  judgment  together 


512 


with  a certain  amount  of  courtesy  and  do  their  duty  to  the 
public  as  well  as  to  the  public  utilities. 

Q.  You  do  appreciate,  do  you  not,  that  the  prime 
necessity  of  rendering  adequate  service  is  a fair  and 
adequate  income! 

A.  Oh,  certainly,  yes,  sir. 

Q.  Is  it  your  observ^ation  that  there  would  be  any 
serious  complaint  on  the  part  of  the  public  provided 
proper  service  were  rendered  to  the  payment  of  a fair 
rate  either  of  street  car  fare  or  gas  rates  or  telephone 
rates  or  electric  light  rates! 

A.  Oh,  I think  as  relates  to  all  public  utilities  that  the 
people  would  rather  pay  an  increased  price  for  real  good 
service  than  to  pay  a low  price  for  inferior  service,  if 
the  proposition  was  put  to  them  just  that  way.  We  had 
a case  recently  where  an  interurban  railway  extending 
from  Joliet  to  Chicago  Heights,  a distance  of  about  25 
miles,  suspended  operations.  Their  employes  demanded 
more  wages  and  the  management  simply  said,  we  can’t 
do  it,  the  income  will  not  warrant  it,  and  they  quit. 

Mr.  Alschuler:  Have  you  anything  further  that  you 
care  to  say,  Mr.  ISfoble! 

A.  I think  that  covers  about  everything. 

Commissioner  Lucey:  What  street  car  fare  are  you 
paying  in  Joliet! 

A.  We  are  paying  ten  cents. 

Chairman  Wilkerson:  It  is  the  highest  in  the  state, 
isn’t  it! 

A.  I don’t  know  as  to  that,  no,  sir. 

Q.  I think  it  is. 

A.  I guess  they  are  not  asking  any  more,  are  they! 


513 


Q.  I think  not. 

Mr.  Cheadle : Mr.  Noble,  may  I ask  you  a question? 

A.  Certainly. 

Q.  In  your  long  experience  in  the  real  estate  business, 
what  would  you  say  as  to  the  effect  upon  real  estate 
values  of  the  extension  of  utility  facilities  into  newly 
developed  territory? 

A.  Oh,  it  enhances  the  value  very  materially.  Of 
course,  among  real  estate  men  we  are  glad  to  call  atten- 
tion to  the  fact  that  property  in  residence  districts  and 
homes  we  have  for  sale  have  the  advantages  of  the  public 
utilities,  transportation,  electric  light  and  gas  and  all 
of  those  things.  It  is  a very  important  factor  and  it  does 
enhance  the  value  very  materially  of  property. 

Mr.  Blackball : Have  you  heard  much  complaint  about 
the  street  car  fare  in  Joliet,  or  have  you  noticed  any 
material  decrease  in  traffic  on  account  of  the  increased 
fare? 

A.  I heard  some  complaint  when  you  increased  your 
fare  from  five  cents  to  seven  cents,  but  when  you  in- 
creased it  from  seven  cents  to  ten  cents  I didn’t  hear  so 
much  murmuring  about  it.  I think  perhaps  there  is  a 
little  decrease  in  traffic  from  my  observation  at  the  time 
you  made  your  first  increase,  and  I would  say  now  that 
from  my  observation  the  traffic  is  increasing  again,  the 
patronage  of  the  car  line.  Now,  I don’t  know  whether 
that  is  a fact  or  not.  That  would  be  simply  an  observa- 
tion. 

Mr.  Alschuler : I have  no  further  witnesses,  but  I have 
a certified  copy  of  a resolution  I would  like  to  present  to 
the  Commission  for  this  record. 

Chairman  Wilkerson : What  is  it? 


514 


Mr.  Alschuler  : It  is  a resolution  of  the  chamber  of 
commerce  of  the  City  of  Aurora,  certified  to  by  the  sec- 
retary and  passed  on  May  12th.  If  the  Commission  cares 
to  have  me  read  it  now 

Chairman  Wilkerson:  You  may  state  the  substance 
of  it. 

Mr.  Alschuler:  After  the  preamble,  I presume  I can 
best  state  the  substance  of  it  by  reading  it. 

Chairman  Wilkerson:  Very  well. 

Mr.  Alschuler:  (reading) 

‘‘Resolved,  that  it  is  the  sense  of  this  organiza- 
tion that  the  welfare  and  continued  growth  of  the 
City  of  Aurora  is  very  largely  dependent  upon  the 
successful  operation  and  continued  enlargement  and 
growth  of  the  utility  companies  which  serve  this 
city,  and  it  is  further  the  opinion  of  this  organization 
that  service  as  rendered  by  such  utilities  at  a fair 
rate  is  of  prime  importance  to  the  people  of  this  city ; 
and  be  it  further 

“Resolved,  that  the  Public  Utilities  Commission 
of  Illinois  be  advised  that  it  is  the  desire  of  this 
organization  that  the  public  utilities  operating  in 
the  City  of  Aurora  be  permitted  to  earn  a fair  and 
adequate  rate  of  return  on  their  respective  invest- 
ments by  the  establishment  of  fair  and  adequate 
rates  for  the  services  and  commodities  furnished  by 
them,  so  that  they  may  be  enabled  to  properly  meet 
the  increased  costs  of  labor  and  rhaterials  employed 
and  used  by  them  and  to  properly  finance  themselves 
so  that  as  a natural  consequence  thereof  they  will  be 
enabled  to  properly  and  adequately  serve  the  public 
and  provide  improvements  and  extensions  to  their 
plants  and  facilities  to  meet  the  demands  made  upon 
them ; and  be  it  further 

Resolved,  that  a copy  of  these  resolutions,  duly 
certified,  be  forwarded  to  the  secretary  of  the  Com- 
mission at  Springfield.’^ 


515 


That  is  all,  may  it  please  the  Commission,  we  have  to 
offer. 

Chairman  Wilkerson : Is  there  anyone  else  who  desires 
to  be  heard  on  the  questions  which  the  Commission  now 
has  under  consideration!  The  order  appointing  a date 
for  these  hearings  recited  that  interested  utilities,  civic 
associations  and  municipalities  would  be  accorded  the 
opportunity  of  presenting  evidence  and  suggestions  to 
the  Commission.  If  there  is  anyone  else  who  desires  to 
submit  any  facts  for  the  consideration  of  the  Commis- 
sion or  to  submit  any  suggestions,  the  Commission  will 
now  be  pleased  to  receive  them. 

Mr.  Alschuler:  I would  like  to  state  into  the  record 
that  the  chamber  of  commerce  of  Aurora  comprises  about 
eleven  hundred  people,  approximately. 

Mr.  Berry:  Mr.  Chairman. 

Chairman  Wilkerson:  Senator  Berry. 

Mr.  Berry : I would  hate  to  see  these  two  meetings  in 
this  city  before  the  Commission  adjourn  without  all  of 
the  utilities,  and  I think  I speak  for  all  of  them  in  this 
matter,  voicing  their  appreciation  of  the  action  of  the 
Commission  in  giving  us  an  opportunity  to  be  heard.  It 
was  initiated  by  your  board  and  I think  we  all  feel  that  it 
has  very  materially  assisted  in  causing  us  to  gather  to- 
gether and  assimilate  a great  deal  of  this  information 
that  has  been  brought  out  by  this  hearing,  and  I wish  to 
speak  for  the  interests  present^ — I assume  that  so  far  as 
the  car  lines  are  concerned,  I see  they  all  nod — and  we 
appreciate  very  much  this  opportunity  given  the  utilities 
of  the  state  to  present  the  views  of  their  experts  and  of 
their  people  to  the  Commission  and  we  thank  you  for  this 
opportunity  to  do  so. 


516 


Chairman  Wilkerson:  Before  closing  the  record  in 
this  case,  I desire  on  behalf  of  the  Commission  to  express 
our  appreciation  of  the  work  of  those  who  have  collected 
and  analyzed  the  information  which  has  been  submitted. 
The  questions  under  consideration  have  been  general 
ones  as  to  which  we  are  supposed  as  a matter  of  law  to 
know  many  of  the  facts,  but  I can  assure  you  that  the 
careful  work  which  has  been  done  in  collecting  and 
analyzing  the  facts  will  tend  to  lighten  the  labors  of  the 
Commission  when  it  comes  to  deternime  the  concrete 
questions  which  arise  from  time  to  time. 

A great  deal  has  been  said  during  the  progress  of  this 
hearing  relative  to  alleged  popular  disapproval  of  utili- 
ties and  of  any  acts  which  have  to  do  with  the  increase 
of  rates.  This  Commission  has  had  occasion  in  a number 
of  cases  to  point  out  that  after  all  the  question  w^hich  is 
really  involved  is  one  of  the  confiscation  of  property.  It 
is  a question  which  wiU  have  to  be  squarely  made  and 
will  have  to  be  squarely  met  in  this  State,  and  I venture 
the  assertion  that  when  that  question  is,  as  it  will  have 
to  be,  submitted  to  the  acid  test  of  popular  approval  that 
repudiation  and  confiscation  will  today  receive  as  little 
favor  at  the  hands  of  the  people  of  this  State  as  they 
have  in  the  past. 

Let  the  record  show  that  the  hearing  is  closed  as  far  as 
Springfield  is  concerned. 

Adjourned. 


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